Fed expected to deliver further tightening despite political shift

TD Securities analysts project the Federal Reserve will implement an additional 50 basis points of rate hikes by the first quarter of 2027, despite the Democratic blue wave in the recent midterm elections. The firm maintains confidence in continued tightening as inflation remains elevated and the economy stays firm, even as Chair Warsh may adopt a more hawkish stance while the Committee shifts dovish.

Analysts note that the outcome of the Iran War and the outlook for AI investment will determine the extent of future policy adjustments. If tensions ease or AI investment is pared back, the Fed might halt further hikes after March. The political shift also opens the door for committee turnover, with Chair Powell potentially retiring, though the risk of understaffing persists if replacements are not appointed.

Market volatility is expected to remain elevated as investors re-focus on macro fundamentals rather than political noise. While risk aversion has tempered post-election euphoria, the US dollar faces pressure from falling bond yields and hopes for de-escalation in Iran, while gold approaches the $4,000 mark per troy ounce.

Read the full story at fxstreet.com.