Raphael Bostic said a neutral policy setting could be 0.25 to 0.50 percentage points below the current Fed policy rate. He said the Fed would need to consider rate rises if inflation increases more than expected.
He gave GDP growth forecasts of 2.4% in 2026 and 2.1% in 2027. He said growth would return to trend in 2028.
Neutral Rate Implications
He said more fiscal stimulus is expected and would expand the economy. He also said it would add pressure to inflation.
He said the latest PCE inflation reading remains far from the 2% target. He said if inflation moves “the wrong way” and starts rising, rate rises would need to be considered.
He said a Supreme Court ruling could create uncertainty over whether new supply and pricing standards stay in place or change. He also raised questions about whether the administration can impose the same tariffs through other means or is constrained.
With the Fed’s policy rate currently at 4.75%, these comments signal that the central bank sees very little room for rate cuts in the near term. We should view this as a direct challenge to market expectations, which have been pricing in at least two cuts by year-end. This shift in tone suggests a more hawkish stance is now on the table.
Market Positioning Implications
The inflation data supports this caution, as the January 2026 Core PCE report came in hotter than expected at 3.1%, an increase from the 2.9% we saw at the end of 2025. This reverses the steady disinflationary trend and gives credibility to the idea that prices could move the “wrong way.” With GDP growth projected to be a strong 2.4% this year, inflationary pressures are not fading as quickly as hoped.
For interest rate traders, this means the risk is now skewed towards rates staying higher for longer, or even rising. We believe selling futures contracts tied to the Secured Overnight Financing Rate (SOFR) for late 2026 delivery could be a prudent move. This strategy profits if the market reprices away from the currently anticipated rate cuts.
In the equity markets, this warning should be seen as a signal to buy protection against potential volatility. The VIX has been hovering near a low of 14, indicating a high degree of market complacency similar to what we observed in late 2025 before a sharp correction. Buying call options on the VIX or put options on the S&P 500 is now a relatively cheap way to hedge against a market shock.
This rhetoric also strongly favors the US dollar, as other major central banks remain more dovish. We saw how the dollar weakened in the second half of 2025 as the market priced in aggressive Fed cuts. A reversal of those expectations suggests it is time to consider long positions in the dollar against currencies like the euro or the yen.
