Global Macro Chart of the Day: Fed policy rules point to hikes now and cuts later

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Global Macro Chart of the Day: Fed policy rules point to hikes now and cuts later

Global Research

27 July 2026ab

Global Macro Chart of the Day Economics

Global(#132): Fed policy rules point to hikes now and

cuts later Arend Kapteyn

Economist

arend.kapteyn@ubs.com

+44-20-7567 0531

A test of patience and confidence in the data

We believe the FOMC is split roughly down the middle in terms of those inclined to raise

rates and those preferring to remain on hold, leaving it to Chair Warsh to cast a deciding

vote. More precisely, we believe that among the voting part of the FOMC the split is 9:3

or 8:4 in favour of holding, but those that prefer to hike likely feel stronger than those

that would prefer to wait. As a result, Warsh could likely assemble sufficient support

either to raise rates in defence of the Fed's inflation-fighting credibility or to wait for

more evidence. As the minutes of the previous meeting made clear, the division reflects

differing expectations about the trajectory of the data rather than fundamentally

different policy frameworks. See our US weekly for detail.

Monetary policy rules, such as the Taylor rule and the balanced-approach rule, were a

good way of describing the behavior of the Fed under Powell. The Fed stopped

tightening once the policy rate had returned to levels implied by those rules, and

subsequently cut rates in 2024 and again in 2025 as the rules moved lower. However,

the FOMC does not follow these rules mechanically, sometimes allowing deviations

when other considerations warrant. Today, the rules suggest the Fed funds rate should

already be 140bp higher, reflecting still-elevated core PCE inflation and unemployment

near NAIRU. Yet under our forecasts, those same rules converge back to the current