#MarketsRepriceFedRateHikes
Markets Re-price Fed Interest Rate Expectations: Hopes for Cuts Postponed, Risk of Increases on the Table
The US Federal Reserve's (Fed) cautious stance and the inflation risk triggered by tariffs are sharply changing expectations regarding the interest rate path in the markets. Investors who in recent weeks were pricing in an "aggressive rate cut in 2025" scenario are now considering both a postponement of cuts and, with a limited probability, a rate hike.
Fed's Latest Message: Wait-and-See, No Hasty Cuts
The Fed kept its policy rate stable at 4.25–4.50%, maintaining its June projections of a half-point rate cut by the end of 2025. However, Chairman Jerome Powell emphasized that "no one is bound to this path with great confidence" and stated that the Trump administration's import tariffs would lead to "a significant increase in inflation in the coming months."
The Fed's projections foresee growth slowing to 1.4% in 2025, unemployment rising to 4.5%, and inflation remaining at 3% by the end of the year—a scenario described as "moderate stagflation." Disagreements within the committee are also evident: 7 of the 19 members believe no rate cuts will be needed in 2025.
Market Reaction: Rate Cuts Delayed, Rate Hike Pricing Begins
A majority of economists surveyed by Reuters expect the Fed to keep rates steady at least until September; 59 of 105 economists predict the first cut will come in September, while a minority of 42% believe the cut will be delayed until the fourth quarter or later.
More noteworthy is the change in derivatives markets: with Brent oil rising to $97 and WTI to $95, investors have begun pricing in a 25% probability of a Fed rate hike in 2026. Concerns that rising energy costs will accelerate inflationary pass-through are weakening the “tariff cycle” narrative.
Asset Prices Seek Direction
Market reaction to recent Fed decisions has been cautious:
S&P 500 tested a record high and retreated, Nasdaq rose 0.3%, Dow remained flat
US 10-year Treasury yield fell to 4.2791%
Dollar index rose 0.35% after the decision
According to Morgan Stanley data, the S&P 500 provides an average monthly yield of 1.7% during periods when the Fed cuts interest rates—but this support is weakening with the postponement of cuts.
Analysis: Fed Faces Two-Way Risk
As Powell put it, “if there were no tariffs, cuts could already be on the agenda.” However, the pass-through of the cost shock from producer to consumer is not yet complete, and the Fed wants to “wait a few months and see the data.”
This is a clear message for the markets: Rate cuts are on the table, but not automatic. If tariffs keep inflation above its 2% target, the risk increases that the Fed will either slow down its rate cuts in 2026 (only 25 bp per year in 2026-2027) or move towards rate hikes.
The critical threshold for investors will be oil prices surpassing $100 and core PCE remaining above 3%. Until then, "wait-and-see" pricing will continue to keep volatility high across asset classes.
Markets Re-price Fed Interest Rate Expectations: Hopes for Cuts Postponed, Risk of Increases on the Table
The US Federal Reserve's (Fed) cautious stance and the inflation risk triggered by tariffs are sharply changing expectations regarding the interest rate path in the markets. Investors who in recent weeks were pricing in an "aggressive rate cut in 2025" scenario are now considering both a postponement of cuts and, with a limited probability, a rate hike.
Fed's Latest Message: Wait-and-See, No Hasty Cuts
The Fed kept its policy rate stable at 4.25–4.50%, maintaining its June projections of a half-point rate cut by the end of 2025. However, Chairman Jerome Powell emphasized that "no one is bound to this path with great confidence" and stated that the Trump administration's import tariffs would lead to "a significant increase in inflation in the coming months."
The Fed's projections foresee growth slowing to 1.4% in 2025, unemployment rising to 4.5%, and inflation remaining at 3% by the end of the year—a scenario described as "moderate stagflation." Disagreements within the committee are also evident: 7 of the 19 members believe no rate cuts will be needed in 2025.
Market Reaction: Rate Cuts Delayed, Rate Hike Pricing Begins
A majority of economists surveyed by Reuters expect the Fed to keep rates steady at least until September; 59 of 105 economists predict the first cut will come in September, while a minority of 42% believe the cut will be delayed until the fourth quarter or later.
More noteworthy is the change in derivatives markets: with Brent oil rising to $97 and WTI to $95, investors have begun pricing in a 25% probability of a Fed rate hike in 2026. Concerns that rising energy costs will accelerate inflationary pass-through are weakening the “tariff cycle” narrative.
Asset Prices Seek Direction
Market reaction to recent Fed decisions has been cautious:
S&P 500 tested a record high and retreated, Nasdaq rose 0.3%, Dow remained flat
US 10-year Treasury yield fell to 4.2791%
Dollar index rose 0.35% after the decision
According to Morgan Stanley data, the S&P 500 provides an average monthly yield of 1.7% during periods when the Fed cuts interest rates—but this support is weakening with the postponement of cuts.
Analysis: Fed Faces Two-Way Risk
As Powell put it, “if there were no tariffs, cuts could already be on the agenda.” However, the pass-through of the cost shock from producer to consumer is not yet complete, and the Fed wants to “wait a few months and see the data.”
This is a clear message for the markets: Rate cuts are on the table, but not automatic. If tariffs keep inflation above its 2% target, the risk increases that the Fed will either slow down its rate cuts in 2026 (only 25 bp per year in 2026-2027) or move towards rate hikes.
The critical threshold for investors will be oil prices surpassing $100 and core PCE remaining above 3%. Until then, "wait-and-see" pricing will continue to keep volatility high across asset classes.
:
:
