Federal Reserve: Surprise risk keeps global rates elevated – ING

ING’s Michiel Tukker expects the Federal Reserve (Fed) to keep rates on hold, even as markets price a 30% chance of a hike.

He notes that any decision will move United States (US) rates and influence global curves. Tukker highlights that shorter-dated yields could rise further, while longer-dated global rates may struggle to follow if financial conditions tighten.

Fed decision risk and curve dynamics

"We don't think the FOMC will hike rates, but markets see a 30% probability that it does. The front end of the EUR and GBP markets can move even higher on a hawkish tilt. Longer-dated global rates, however, could find resistance to follow through, especially if the positive market sentiment gets challenged by a tightening of financial conditions."

"Global markets will be bracing for the Fed meeting as we’re bound to have a surprise, but the direction remains up for debate. Markets seem to settle at around a 30% probability of a hike, which means both a hold and a hike should push rates around. The narrative around the decision matters too, especially the stance of Fed Chair Kevin Warsh if the option to hike rates is chosen."

"We could also imagine a scenario where market sentiment takes a hit if the Fed hikes as risk assets suffer from tighter financial conditions. Already we’re seeing increasing jitters in equities on the back of AI uncertainties. In this case, the curve reaction should be of interest."

"Shorter rates would be pushed upward, but longer rates might find resistance to follow. In this case, the positive global growth outlook could be challenged. Expect flatter global curves in this outcome."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)