Fed to Hold Rates Steady With Upside Hike Risk, TD Securities Says

TD Securities expects the Federal Reserve to maintain its current on-hold monetary policy stance, but with a notable upside risk that the next move could be a rate hike rather than a cut, according to a recent research note. The analysis suggests that persistent inflationary pressures and a resilient labor market are key factors keeping the door open for further tightening.

Hawkish Hold: The Core of the Forecast

The core of TD Securities’ outlook is that the Fed will keep the federal funds rate at its current level for an extended period. This is not a neutral hold, but a hawkish one, where policymakers are prepared to act if economic data does not cool sufficiently. The firm’s economists point to sticky services inflation and above-trend wage growth as primary concerns that prevent the Fed from signaling any imminent easing. The market has largely priced out rate cuts for the first half of the year, aligning with this view, but TD Securities goes further by highlighting the asymmetric risk of a hike.

Why a Hike Remains on the Table

The analysis emphasizes that the Fed’s dual mandate—price stability and maximum employment—is currently in tension. While the labor market remains tight, with unemployment near historic lows, inflation has proven stubbornly above the 2% target. TD Securities argues that if monthly core PCE inflation readings re-accelerate or if financial conditions ease too much, the Fed could feel compelled to raise rates again. This contrasts with market pricing that still sees a cut as more likely than a hike over a 12-month horizon, creating a potential disconnect.

Implications for Markets and Borrowers

For investors and borrowers, this forecast carries significant implications. A prolonged hold with a hike bias means interest rates will stay higher for longer than many anticipated. This environment pressures rate-sensitive sectors like housing and small business, while potentially benefiting short-term bond yields. The US dollar could also find support from a relatively more hawkish Fed compared to other major central banks. TD Securities advises clients to prepare for a scenario where rate cuts are delayed until 2026 or later, contingent on a clear economic slowdown.

Conclusion

TD Securities’ assessment reinforces the view that the Federal Reserve is in no hurry to cut rates and remains vigilant against inflation. The upside risk of a hike, while not the base case, is a credible scenario that investors must account for. The path forward depends entirely on incoming data, making each jobs report and CPI release a critical market event.

FAQs

Q1: What does a hawkish on-hold stance mean?
A hawkish on-hold stance means the central bank keeps interest rates unchanged but signals a willingness to raise them if inflation or economic activity does not cool down. It implies no imminent rate cuts.

Q2: Why does TD Securities see an upside risk of a hike?
TD Securities cites persistent inflation, especially in services, and a still-tight labor market as reasons the Fed might need to tighten policy further. If data shows inflation re-accelerating, a hike becomes more likely.

Q3: How does this affect the average consumer?
Higher-for-longer interest rates mean borrowing costs for mortgages, car loans, and credit cards remain elevated. It also means savings accounts and CDs may continue to offer attractive yields for longer.