Financial markets and major banks are converging on the expectation that the U.S. Federal Reserve will maintain its current interest rate policy for an extended period. HSBC has reiterated its forecast that the Fed will keep interest rates unchanged throughout 2026 and 2027, citing persistent inflationary pressures and rising geopolitical risks as key factors creating uncertainty.
The bank noted that the Fed held its policy rate steady at a range of 3.50%-3.75% at its March meeting, adopting a "wait-and-see" approach. HSBC highlighted that a sharp rise in energy prices is increasing inflation risks, while risks to the labor market have somewhat decreased. The bank also suggested that volatility in energy prices and geopolitical developments could bolster safe-haven demand, contributing to a strong U.S. dollar.
This outlook is strongly supported by market-derived data. The CME FedWatch tool currently shows an overwhelming 87.6% probability that the Fed will hold rates at its upcoming April Federal Open Market Committee (FOMC) meeting. The probability of a 25-basis-point hike is a mere 12.4%. This represents a significant shift from earlier in 2025, when markets were pricing in potential rate cuts.
The Fed's current stance follows an aggressive tightening cycle that began in early 2022, raising rates from near-zero to a restrictive range of 5.25% to 5.50%. The central bank has been in a prolonged pause since July 2023. Officials, including Chair Jerome Powell, have consistently emphasized a data-dependent approach, requiring greater confidence that inflation is moving sustainably toward its 2% target before considering any policy changes.
Upcoming economic data releases, including the March Consumer Price Index (CPI) and jobs reports, will be critical for the April decision. Key metrics under watch include Core PCE inflation (currently at 2.8% year-over-year), the unemployment rate (3.9%), and wage growth. Economists widely align with the market's expectation for a hold, noting that the "last mile" of inflation reduction is often the most difficult and that the Fed is in no rush to alter its course.
