Ross and Rachel. Tim and Dawn. Sam and Diane. Classic TV characters who all bring to mind one simple phrase:
Will they, won’t they?
Just like sitcom viewers of old, investors have been hooked in recent months by an ongoing saga: whether the Federal Reserve (Fed) – America’s equivalent of the Bank of England – is going to raise interest rates this month.
Where sitcom watchers experienced rollercoasters of emotions, today’s investors have been on a rollercoaster of changing expectations, with the odds that the Fed will act jumping up and down in response to different news headlines. And keep in mind – as the world’s largest economy and stock market, what happens in the States is likely to have an impact on most investors’ portfolios worldwide, including here in the UK.
Let’s rewind for a second just to recap the background to the situation.
The expectation when we first entered 2026 was that US interest rates would FALL this year. Then Donald Trump’s misadventure in Iran changed all that, with the production and export of oil, as well as key inputs into food production, badly disrupted. This caused these key costs to shoot up and prevent the decline in inflation that had been expected this year from happening.
In addition to Iran, last year’s tariff fun and games – also brought to you by Donald Trump – have also had an effect on prices. So too has the fundamental strength of the US economy, which could lead to higher wages.
Thanks to these factors and more, annual core inflation has now been above the official 2% target every month for more than five years. The Fed’s new chair, Kevin Warsh, sounded distinctly unhappy about this in a recent big speech – and suggested that the central bank had work to do to bring inflation back down to target.
Perhaps though, Warsh is just talking tough as a cover to avoid having to raise rates. After all, President Trump – who appointed him – had a very public social media message for him last week:
Lower the interest rates… A STRONG COUNTRY MEANS A LOWER INTEREST RATE – IT’S A BETTER CREDIT… Very simple! We should have the LOWEST RATE of any country in the World… The Fed Board, with its great new leader, must get smart – BE PATRIOTS for a change.
Hm. That’s not really how it works but hey-ho. And it’s quite a lot of pressure for Mr Warsh to withstand.
So – will they, won’t they? The current consensus odds suggest a 60% chance of the Fed raising rates – still not that far off being a coin flip. This matters because, by and large, asset markets don’t like higher rates OR surprises. So we could be in for a bumpy few days or weeks after the Fed meets next week – but at least global companies are starting from a position of real strength. The key fundamental of growing company profits remains in place.
Whatever the Fed elects to do, let’s hope that they get it together in the end – just like those TV couples.
