fed review

Research US Fed review: Reversing course (?) Our Fed call (unchanged) • The Fed maintained its monetary policy unchanged in the July meeting. Three participants voted for a hike in line with our expectations, but importantly, Chair • Two 25bp rate hikes in Dec26 and March27. Warsh voted with the majority for unchanged rates. Rates maintained at 4.00-4.25% through rest of 2027. • Warsh’s tone was noticeably more neutral compared to his previous press conference, as he appeared satisfied with the rise in real rates since mid-June. • Perhaps counterproductively, markets reversed part of its reaction to the June Chart 1: UST yield curve re-steepened after meeting. UST curve steepened, as markets cut back rate hike expectations and the July meeting driven by lower short-end priced higher long-end inflation expectations. EUR/USD rose back above 1.14. policy rate expectations and higher long- end inflation expectations • We still think the macro case for tightening policy later on remains strong, and the market reaction could spark pushback from Fed speakers over coming days. We maintain our call for hikes in December and March meetings. At face value, the FOMC’s 9-3 split decision hold was exactly in line with the expectations we laid out in our Fed preview – a divided hold, 22 July. We also named the three dissenters – Hammack, Logan and Kashkari – as the most likely hawks to support rapid tightening. But the most important part of forward guidance for markets was that Chair Warsh himself voted for an unchanged decision despite his hawkish commitment to price stability heard in June. Warsh highlighted several times that real rates had risen during the intermeeting period because markets were taking the signal from data, instead of forward Sources: Macrobond, Danske Bank guidance. We do not share this view, as data released in late June landed close to Note: Past performance is not a reliable indicator of expectations, and instead believe markets were reacting to Warsh’s words of a current or future results.

‘regime shift’. And in this light, tonight’s reaction felt like markets reconsidering their confidence in the Chair’s ability to deliver on the promise of price stability. Chart 2: Markets are pricing around 65% Markets cut back rate hike expectations, with cumulative hike pricing declining from probability for a September hike 56bp to 50bp. The implied odds for a September hike declined from near-certain down to 65%. But more importantly, the UST yield curve saw the sharpest steepening since late March in 2s10s terms, as long-end inflation expectations moved higher. The current level (10y inflation swap at just above 2.3%) is by no means concerning as such, but if Warsh was happy with the post-June market reaction, tonight’s shift was likely not what he intended. We still think the macro case for tightening later on remains solid. AI-capex spending, retightening labour market balance, consumers’ high propensity to spend and supportive fiscal policy all add to risk of persistent inflation. And if financial conditions ease further, Warsh might be forced to reconsider his vote already in September. Sources: Macrobond, LSEG, Danske Bank. We maintain our base case for 25bp rate hikes in the December and March meetings. Note that the Fed made no changes to its balance sheet policy, and Warsh did not hint of changes before results from the task forces, which are expected by year-end. Senior Analyst, US The NY Fed guides for reserve management purchases of T-bills at USD10bn/month. Antti Ilvonen

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Disclosures This research report has been prepared by Danske Bank A/S (‘Danske Bank’). The author of this research report is Antti Ilvonen, Associate. Analyst certification Each research analyst responsible for the content of this research report certifies that the views expressed in the research report accurately reflect the research analyst’s personal view about the financial instruments and issuers covered by the research report. Each responsible research analyst further certifies that no part of the compensation of the research analyst was, is or will be…