HSBC's Fed Standstill Call: A Flow of Risk and Rate Expectations

The Federal Reserve delivered a second consecutive hold, keeping the benchmark rate at 3.50%-3.75% for a second straight meeting. Officials cited a slightly faster pace of growth and higher inflation projections for 2026, while also flagging uncertainty from the Middle East conflict. This less dovish-than-anticipated tone sparked an immediate risk-off reaction, with equities falling and bond yields rising as traders scaled back expectations for near-term easing.

The market's response was a dramatic flow reversal. Just days ago, pricing showed a clear path for two rate cuts by year-end. Now, that view has flipped completely. Market data indicates about 75% probability of a rate hike by September, with better-than-even odds of a move as early as July. This represents a seismic shift from expectations of cuts, driven by the Fed's focus on persistent inflation and the geopolitical shock to energy prices.

The bottom line is a sharp recalibration of risk. The Fed's "wait-and-see" stance, reinforced by Governor Christopher Waller's pivot to a hawkish vote, has reset the trajectory. The initial equity sell-off and Treasury yield spike show that the market is pricing in a prolonged period of higher-for-longer rates, directly challenging the narrative of an imminent easing cycle.

HSBC's Divergent Forecast and Its Drivers

HSBC is taking a starkly different view from the market, maintaining its forecast that the Fed will keep rates unchanged throughout 2026 and 2027. The bank argues there is simply no clear path forward for policymakers, as resilient growth and persistent inflation create a stalemate. This stance places HSBC squarely at odds with the consensus, which currently prices in one or two rate cuts for 2026.

The bank's bullish growth outlook is the core driver of its hawkish call. HSBC expects US growth to edge up to 2.3% in 2026, fueled by tax cuts, AI hardware demand, and strong equity prices. This expansion reduces the urgency for the Fed to cut rates to stimulate the economy. In essence, the bank sees the economic justification for easing as absent.

This forecast creates a clear divergence in risk positioning. While the market is pricing in a shift to cuts, HSBC's view supports a prolonged period of higher-for-longer rates. The bank's outlook for a stable, albeit slightly stronger, US economy underpins its overweight on US equities and its neutral stance on Treasuries, which it sees as range-bound. The bottom line is a bet on sustained economic momentum outweighing inflation and geopolitical risks.

Catalysts and Risks for the Thesis

The primary catalyst for validating the Fed's wait-and-see stance is the ongoing conflict in the Middle East. This has pushed oil prices above $100 and gasoline to $3.88 per gallon, directly pressuring inflation and consumer spending. The Fed's own statement noted that near term measures of inflation expectations have risen due to supply disruptions, creating a clear inflationary headwind that could force a prolonged hold.

A major risk to the standstill call is political pressure on the Fed. The central bank is already facing a legal battle over subpoenas for Chair Powell, highlighting a tense relationship with Congress. This friction could pressure policymakers to act on political timelines, even if economic data doesn't justify a move. The Fed's current lack of forward guidance leaves it vulnerable to such external forces.

The next major test is the Fed's own inflation and growth projections, due in the coming weeks. These will provide the clearest data on whether the slightly faster pace of growth and higher inflation projections for 2026 are becoming entrenched. If the projections confirm persistent inflation and strong growth, it will validate the wait-and-see approach. If they show a sharper deceleration, it could force a reconsideration of the entire stance.