MBSB Research expects the US Federal Reserve to retain a relatively hawkish policy stance, with scope for another 25-basis-point rate hike before the end of 2026 if inflationary pressures remain elevated.
The Federal Open Market Committee (FOMC) raised the federal funds rate target range by 25bps to 3.75%-4.00% at its September meeting, with the decision receiving unanimous support. The Fed said economic activity continued to expand at a solid pace while inflation remained elevated above its 2% longer-run goal.
MBSB described the move as the Fed’s first rate hike since 2023 and said it was broadly in line with expectations, reflecting policymakers’ efforts to contain persistent inflation without significantly derailing still-resilient economic activity.
The research house said US economic conditions remain relatively firm, supported by stronger consumer spending, robust business investment and a stable labour market.
US headline inflation remained at 3.4% year-on-year in August, according to the report, with energy inflation accelerating to 16.3% and gasoline prices rising 27.4%. Core inflation, however, moderated to 2.4% from 2.5% in July.
MBSB said the combination of resilient growth and persistent headline inflation gives the Fed room to maintain restrictive monetary policy, although further tightening could increasingly weigh on rate-sensitive parts of the economy.
The Fed’s latest Summary of Economic Projections also pointed to a firmer growth outlook. MBSB noted that the median forecast for US real GDP growth in 2026 was raised to 2.3% from 2.2%, while the unemployment rate projection was lowered to about 4.1%. The latest projections were released alongside the Sept 15-16 FOMC meeting.
At the same time, inflation is expected to remain above target for longer, with MBSB citing projected headline personal consumption expenditure inflation of 3.7% in 2026 and core PCE inflation of around 3.4%.
The research house said the updated rate projections suggest the September increase may not be a one-off move, with most policymakers anticipating at least one additional increase this year.
MBSB added that Fed Chair Kevin Warsh had stressed that future decisions would remain dependent on incoming economic and inflation data rather than follow a predetermined path.
The research house also highlighted the rise in long-term US Treasury yields, which it said reflected not only expectations of tighter monetary policy but also stronger economic growth, greater competition for capital from technology and artificial intelligence-related investment, and higher geopolitical risk premiums.
MBSB said these factors could keep longer-term yields elevated even if expectations for the federal funds rate eventually stabilise.
Looking ahead, it sees another rate hike as possible if supply disruptions, high energy prices and rising raw material costs continue to sustain inflation.
Conversely, an easing of geopolitical tensions, particularly if accompanied by lower global oil prices, could reduce energy-related inflationary pressure and lessen the need for further tightening.
The next scheduled FOMC meeting is on Oct 27-28, 2026.
