The Federal Reserve is expected to raise interest rates by 25 bps today, bringing the federal funds target range to 3.75%-4.00%. It would be the first rate hike since 2023, as persistently above-target inflation and very slow disinflation push the FOMC back toward a more restrictive policy stance.
Today’s rate hike is already priced in, meaning the rate decision itself is unlikely to be the main source of volatility. Instead, traders will be looking closely at the dot plot and Chair Warsh’s communication for clues about how much further the Fed thinks rates need to rise.
STATEMENT
The statement will of course change to reflect the rate hike, so the first two paragraphs are expected to show a majority in favour of increasing the target range for the federal funds rate to 3-3/4 to 4 percent. There seems to be a consensus for just one or two dissenters voting for a hold, with Fed’s Bowman being the most dovish governor. There shouldn’t be major changes to other parts of the statement, although the inflation part could note the slow pace of disinflation.
The only major surprise here could be a majority voting to keep rates unchanged. That would be VERY dovish and will send inflation expectations higher. The reaction in the markets should be kind of straight forward, with gold and precious metals gaining and bonds and the US dollar selling off hard. The stock market could benefit at the margin.
FOMC Statement – July 2026:
Potential surprises:
- Majority votes for a hold – strongly dovish
SUMMARY OF ECONOMIC PROJECTIONS AND DOT PLOT
The Summary of Economic Projections (SEP) is expected to show a slight downward revision for unemployment and upward revision for near-term inflation. Growth forecasts are expected to remain unchanged.
The focus will be mainly on the dot plot. The consensus is for the median dot to show a total of 75 bps of tightening by the end of 2027, with two hikes in 2026 (today’s included) and one in 2027. This would effectively erase the three rate cuts delivered in 2025, but it would still be less hawkish than the current four hikes priced in by the market.
CURRENT MARKET PRICING
- By the end of 2026: 52 bps – two rate hikes (today’s included)
- By the end of 2027: 95 bps – four rate hikes (today’s included)
The potential surprises here revolve around the total amount of tightening the Fed projects. If the median dot shows three or more further hikes by the end of 2027, it will likely be taken as a hawkish surprise. The reaction in the markets will likely be positive for the US dollar and long-term bonds and negative for pretty much everything else including stocks, precious metals and cryptocurrencies.
If the median dot shows two further hikes, then it would be in line with the consensus and the reaction might be slightly dovish, with the US dollar losing ground and precious metals, cryptocurrencies and stocks benefiting.
If the Fed projects just one more or even zero hikes by the end of 2027, it would be taken as a dovish surprise. The most straigth-forward reaction would be a rally in precious metals and cryptocurrencies, while the US dollar and bonds would highly likely sell-off hard.
SEP June 2026:
Potential surprises:
- Two more hikes in 2026 and two in 2027 – hawkish
- Two more hikes in 2026 and zero in 2027 – slightly hawkish
- Just one more in 2026 and zero in 2027 – dovish
- No more rate hikes – strongly dovish
PRESS CONFERENCE
Fed Chair Warsh is once again unlikely to provide explicit forward guidance. He’s expected to repeat his Jackson Hole message, highlighting the slow inflation progress and the Fed’s committment to return inflation back to 2% target. To read Warsh’s Jackson Hole speech, click here. Traders will be attentive to deviations from his recent communication, especially on the hawkish side.
This article was written by Giuseppe Dellamotta at investinglive.com.