Fed Eyes Prolonged Rate Pause Amid Inflation and Geopolitical Risks

The Federal Reserve is expected to maintain its current stance on interest rates at its upcoming July meeting. According to UOB Global Economics & Markets Research, there's a strong likelihood that the Fed will keep the Federal Funds Target Rate (FFTR) between 3.50%-3.75%.

This assessment aligns with consensus expectations from Bloomberg and reflects the bank's base case for an extended pause through 2026. The prolonged policy pause is anticipated to be followed by a resumption of easing in 2Q and 4Q 2027, as transitory inflation pressures subside.

However, rising concerns over oil prices and geopolitical tensions have increased the risk of further rate hikes. OIS swaps currently price in a one-third probability of a 25bp rate hike at the July 29 FOMC meeting, while rates on contracts expiring next year have declined by approximately 5bps.