Fed Signals Extended Pause, Two Potential Cuts Ahead

The Federal Reserve's stance on interest rates has undergone a slight shift following the recent US CPI release. According to UOB, market pricing for a September hike in the Federal Funds Rate (FFR) has decreased, with the probability now at 39.9% compared to 48.1% previously.

UOB's base case remains an extended pause through 2026, with the FFR remaining unchanged. However, the bank projects two 25 basis point cuts in 2027, taking the rate down gradually to around 3.25% by end-2027.

This projected trajectory is based on the assumption that the Fed will remain on pause for the rest of 2026 before resuming its easing cycle in 2027. While risks to this outlook are considered modestly skewed to the upside due to geopolitical and energy-related uncertainties, UOB remains mindful of these non-negligible risks.