TD Securities expects the Federal Reserve to leave the fed funds rate unchanged through 2026, arguing inflation will remain above target while the labour market stabilises, keeping the FOMC focused on its inflation mandate. The bank has revised down its near-term CPI track after a softer-than-expected June report, and now sees core CPI at 2.6% year on year by Q4 2026.<\/p>\n
The firm points to mixed Fed communication ahead of the blackout period and suggests the policy reaction function could be less predictable under new leadership, increasing the role of data dependence in steering monetary policy. In that framework, TD Securities judges that any change in policy this year would be more likely to come via a rate hike than a cut.<\/p>\n
We must prepare for the Federal Reserve to keep interest rates steady for the rest of 2026, especially as core inflation is projected to end the year around 2.6%. With the labor market stabilizing and consumer price pressures remaining sticky, the central bank has little reason to rush into easing. In fact, under the new Fed leadership, the bias for any unexpected policy move is tilted toward a rate hike rather than a cut.<\/p>\n
We recommend that derivative traders adjust their portfolios by fading any aggressive market expectations for rate cuts this fall. Short-term interest rate futures, such as Secured Overnight Financing Rate (SOFR) contracts, are likely overpricing the probability of monetary easing in the near term. Traders should consider positioning for a “higher-for-longer” regime by shorting late-2026 SOFR futures or buying protective put options.<\/p>\n
The transition to a new Fed leadership has introduced a much less predictable policy path, meaning data dependency will drive sharp market swings. We expect implied volatility in the Treasury options market, which has seen the MOVE Index hovering around the 95-point level, to climb as traders digest conflicting signals from central bankers. Going long on interest rate volatility through swaptions will help protect portfolios against sudden hawkish shifts in the coming weeks.<\/p>\n
Historically, transition periods under new Federal Reserve leadership, such as the shift in 2018, have triggered significant bond market volatility as the market tests the new regime. During that period, the 2-year US Treasury yield surged by over 50 basis points within a few months as traders adjusted to the shifting policy tone. We suggest implementing bearish flattener trades on the yield curve to capitalize on similar upward pressure on short-term rates.<\/p>\n\n\n\n