Fed to signal higher rates despite soft activity data

We expect the Fed to leave interest rates unchanged at next week’s FOMC meeting but, in what could be characterised as a “hawkish skip”, to signal via forward guidance (updated SEP forecasts and language in the statement) that officials are minded to hike interest rates again, probably at the following meeting in late-July. We suspect the recent resilience of employment and stickiness of core inflation will ensure that the Fed delivers that rate hike as planned next month. But with the activity data showing increasing signs of weakness and better news on core inflation coming soon, we also anticipate that being the last rate hike in this cycle, although we now don’t expect the first rate cut to come until next year.