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The US Federal Reserve is expected to keep interest rates unchanged in October before resuming monetary tightening, with markets pricing in a further 25 basis points (bps) hike by the end of 2026 and cumulative tightening of 75 bps by mid-2027, according to a commentary by CareEdge Global.
The ratings agency said the Fed's policy outlook had turned increasingly hawkish through 2026, culminating in a 25 bps rate hike in September, as geopolitical developments and elevated inflation reinforced expectations of tighter monetary policy. The US-Israel conflict initially raised the prospect of higher interest rates, while an April ceasefire briefly eased expectations of further tightening. However, renewed conflict and the release of the Federal Open Market Committee's May meeting minutes revived rate hike expectations, the commentary said. The agency noted that a speech by Kevin Warsh in August, followed by elevated Consumer Price Index (CPI) and Producer Price Index (PPI) readings in September, further strengthened the hawkish outlook. Market-implied probabilities indicated a 78.4 per cent likelihood of the federal funds rate remaining in the 3.75-4.00 per cent range at the October meeting, compared with a 21.6 per cent probability of a move to 4.00-4.25 per cent, according to data from CME FedWatch cited by CareEdge Global. By December, markets assigned a 68.1 per cent probability to the rate reaching 4.00-4.25 per cent, indicating expectations of further tightening by the end of the year. The agency also highlighted the implications of higher interest rates for US public finances, noting that gross interest payments already accounted for around 19 per cent of government revenue in 2025. Further monetary tightening could intensify fiscal pressures and reinforce concerns about the country's deteriorating fiscal position, it said. Beyond the United States, CareEdge Global flagged investment-related challenges in Mexico, where uncertainty surrounding the United States-Mexico-Canada Agreement (USMCA) review and judicial reforms continued to delay investment decisions. In Brazil, the agency noted that uncertainty over the presidential race and competing fiscal approaches could influence market sentiment, despite a positive initial market reaction to Flavio Bolsonaro's first-round performance. The commentary highlighted monetary policy, geopolitical developments and fiscal sustainability as key factors shaping the outlook for the global economy and financial markets. (ANI)
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