Following the US Federal Reserve’s decision to hold rates overnight Joe Unwin, Head of Portfolio Management at Apostle Funds Management, discusses what this means for markets and investors.
Dovish hold – the Fed is comfortable holding rates and still expects to cut this year despite forecasting higher inflation
The Fed voted 11-1 in favour of a hold (with one vote for a cut) and continued to forecast one more cut in 2026 and another cut in 2027 to get to a terminal rate of 3.0-3.25%.
At the same time, they increased their 2026 headline inflation forecast from 2.4% to 2.7% and core inflation from 2.5% to 2.7% in the wake of the Middle East conflict. This is on the back of core PCE and PPI both coming in higher than expected in the past few days.
There doesn’t appear to be any serious consideration of a rate hike this year despite these upside inflation risks. That is quite a dovish signal given this level of inflation risk would typically warrant a more balanced discussion.
Recent weakness in the labour market could be a key reason for this.
Markets aren’t convinced and have pared back rate cut expectations
The Fed Funds futures market increased the December 2026 implied rate from 3.38% to 3.50% overnight, effectively going from one rate cut this year to just half a rate cut.
The US 2Yr Treasury yield rose 10bps from 3.67% to 3.77%, further indicating that markets are pricing in slightly higher interest rates moving forward.
Markets are clearly concerned about the inflationary impact of the Middle East conflict, as well as the hotter-than-expected core PCE and PPI data over the last week, and are more cautious on the prospect of rate cuts.
In an environment with upside inflation risk and interest rate uncertainty, floating rate credit may be an attractive alternative to bonds
Floating rate credit, such as bank loans and even private debt, is generally less sensitive to interest rate volatility compared to fixed rate bonds, making it an attractive asset class in an environment with upside risk to inflation.
Bonds (which are fixed rate), on the other hand, tend to be more volatile in an environment where inflation and interest rates are particularly uncertain.
