The Federal Reserve likely will take back all the 2025 'insurance cuts' or not raise interest rates at all, according to RBC Wealth Management
Federal Reserve Chair Kevin Warsh is likely to raise rates by 75 basis points or not at all, says one strategist.
Investors shouldn't count on the Federal Reserve delivering only one interest-rate hike, according to a fixed-income strategist.
The futures market is leaning toward one hike in 2026 as Fed Chair Kevin Warsh seeks to get inflation back down to the central bank's 2% target - but that pricing might only reflect taking the middle ground, says Thomas Garretson, senior portfolio strategist at RBC Wealth Management.
"Either the Fed is not raising rates, or they are raising rates three times," Garretson told MarketWatch.
Garretson's thinking is that any Fed pivot to hikes under Warsh would remove the 75 basis points (0.75 percentage point) of "insurance cuts" in 2025 under former Chair Jerome Powell. The U.S. economy seems to have found some momentum from those cuts, he noted, and the labor market has shown signs of stabilizing.
The economy isn't creating a lot of new jobs, but the unemployment rate eased back to 4.2% in June.
If the labor-market remains solid through the summer, "we think the underlying trend of inflation is still moving in the wrong direction," Garretson said. "In that environment, they need to take back the 2025 rate cuts."
Meanwhile, Wall Street isn't of one view about whether the Fed will hike rates or not. BofA Global in early July maintained its call for three rate hikes, starting in September. The odds had the chances of at least one Fed rate hike this year at almost 40% on Friday, according to the CME FedWatch Tool, with two hikes pegged at about 33%.
Investors will get a new inflation reading on Tuesday from the June consumer-price index. The annual rate topped 4% in May, but the sharp drop in oil prices from the highs of the Iran war are expected to provide some relief.
Yet oil (BRN00) (CL00) isn't the only source of inflation concern. The historic spending blitz by a small group of megacap tech companies also has been relying heavily on borrowed money.
Appetite for AI debt was back in focus after Amazon.com (AMZN) surprised investors with a huge $25 billion bond deal in advance of its second-quarter earnings. That led corporate bond spreads to widen in existing AI-related bonds. Heavy AI bond supply has been noted as a factor in 10-year BX:TMUBMUSD10Y and 30-year BX:TMUBMUSD30Y Treasury yields climbing to 4.56% and 5.07%, respectively, as of Friday.
Freya Beamish, chief economist at GlobalData TS Lombard, said the Fed risks falling behind when it comes to managing inflation related to the AI buildout.
For now, the AI boom "has mostly manifested through a surge in demand for computing capacity and infrastructure and a raging bull market in stocks," Beamish's team wrote in a Friday client note. But if "politics or uncertainty keep the Fed from rising with the economy this year, the market will eventually demand protection, with long-end yields rising and the dollar selling off."
From the archives: History suggests Fed can't make 'insurance cuts' to keep expansion alive
-Joy Wiltermuth
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July 10, 2026 15:02 ET (19:02 GMT)
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