RaboResearch Global Economics & Markets has revised its US Federal Reserve outlook after recent FOMC speeches, adding a December 2026 rate rise. The change reflects greater Fed risk aversion around inflation expectations becoming unanchored and a higher willingness to tolerate demand destruction in sectors outside energy, where this year’s supply shock originated.
The team still forecasts only one additional hike, which contrasts with market pricing for a new hiking cycle of 3–4 extra rate increases. It now expects the Fed to keep policy on hold through 2027, before delivering one rate cut per year from 2028 to 2030, and it continues to see the endpoint at a higher neutral rate than the Fed’s current projection.
Discrepancy in Market Pricing and Trading Opportunities
We believe the market is currently overestimating how aggressive the Federal Reserve will be with interest rate hikes over the next year. While the broader market has priced in three to four additional rate hikes, we project only one final rate increase in December 2026. This discrepancy provides a unique opportunity for derivative traders to position themselves ahead of a major shift in market expectations.
To capitalize on this outlook, we suggest focusing on interest rate futures and options, particularly targeting contracts tied to the late 2026 and 2027 periods. Historically, when the market overestimates the peak policy rate, sovereign bond yields tend to decline once the pause becomes obvious, similar to the bond rallies seen during the rate peaks of 2018 and 2023. We can look to establish long positions in interest rate futures to benefit from this eventual adjustment in market pricing.
Volatility Expectations and Yield Curve Implications
Since we expect the final 25-basis-point rate hike to land in December 2026 due to sticky core inflation, short-term volatility is highly likely to rise in the coming weeks. Traders should consider using volatility strategies, such as options straddles, to capture sharp moves around upcoming employment and inflation data releases. According to recent economic indicators, consumer demand remains resilient outside of energy, meaning any surprise inflation spikes will only reinforce the Fed’s hawkish stance for December.
With policy expected to remain completely on hold through 2027, the yield curve is likely to undergo a significant steepening. We anticipate that the gap between short-term and long-term Treasury yields, which averaged around 50 to 100 basis points during past extended pauses, will begin to normalize. Implementing curve-steepener trades via swap derivatives could yield strong results as the market slowly realizes that rate cuts are postponed until 2028.
