Liquid Insight: US rates: hike risk underpriced

研报英文原文证据摘录

Liquid Insight: US rates: hike risk underpriced

Thinking the unthinkable: US hike risk

We offer frameworks to think about conditions for Fed hikes, how many hikes the

market can price near-term, & broader US rate implications of this shifting risk.

Conditions for Fed hikes: Frameworks = (1) BofA economists (2) Fed SEP.

BofA economists view: “For hikes to be on the table under Warsh, we think the u-rate

would need to fall to/below 4% and core PCE would need to get closer to 3.5%, even as

tariff effects roll off the y/y rate. The case for hikes would strengthen if wages start

accelerating again, or inflation expectations de-anchor” (see report: Change in Fed call).

Fed summary of economic projections (SEP): the SEP at end '26 showed no participant

expecting a hike, the lowest unemployment rate forecast of 4.3%, & highest core PCE

f'cst of 3.0%. We can infer it would take U3 <=4.2% & core PCE >=3.0% to justify hikes.

Both variables are likely trending in that direction.

Hike pricing: Frameworks = (1) recent history (2) Fed cuts in ’25 (3) Taylor rule.

Recent history: Market pricing for '26 hikes previously reached 3.78% (14bps of hikes)

with less certainty on macro data. 14bps in '26 could easily repeat.

Fed cuts in ’25: the Fed cut 75bps in late '25 due to concerns about a softening labor

market. Indeed, Fed cuts were triggered by 6m NFP average falling <30k. Today 6m NFP

average is running 55k and trending upwards (Exhibit 2). Fed risk balance is shifting to

upside inflation > downside labor. If this continues the market may consider a reversal of

the late '25 move. The market won't confidently price 75bp but could price half (37.5bp).

Exhibit 2: NFP 6m MA, Fed target, & UST 2Y

The last time NFP 6m MA was at current level Fed target was 4.5% (+75bp from today)

300 6