Federal Reserve: Divided Hawks Shape Late-2026 Rate Hike Risk - Societe Generale

Internal divisions at the Federal Reserve are setting the stage for rate hike risks in late 2026. Societe Generale analyst Jan Groen notes that the Federal Open Market Committee has formed a split landscape, with the larger "hold steady" camp not being monolithic, but rather waiting for core PCE inflation data in the second half of 2026—if the data provides support, they could shift toward backing rate hikes. Groen expects the Fed to keep the federal funds rate unchanged this year, but the risk of starting rate hikes from the December meeting is considerable, with the final path depending on core PCE performance.

**The "Hold Steady" Camp's Wait-and-See Logic**

The dominant force within the Fed is currently choosing to hold steady, but this resembles more of a tactical wait than a strategic abandonment of tightening. Their decision-making anchor is clearly pointed at the inflation trajectory in the second half of 2026—if core PCE still shows stickiness or even re-accelerates by then, this camp is likely to collectively turn hawkish. This internal split means that inflation data in the coming months will be assigned extremely high weight by the market, and any above-expectation readings could quickly reignite rate hike expectations.

**Significant Divergence from Market's Dovish Expectations**

SocGen's assessment forms a stark contrast with the views of some current asset managers. There is a perspective that, alongside falling international oil prices and a gradually weakening labor market, inflationary pressures will naturally ease, and the Fed will likely keep rates unchanged or even start cutting. But SocGen's warning suggests that such dovish expectations may underestimate the potential explosive force of hawkish elements within the Fed—if core PCE trends do not align with optimistic forecasts, the policy path could sharply pivot. According to market reports, BNP Paribas even predicts the Fed will implement three consecutive rate hikes starting in December, reflecting a severe split on Wall Street over the direction of policy.

**Tail Risk Pricing Remains Insufficient**

The Fed's internal split increases uncertainty over the policy path, and market pricing for this may still be inadequate. If core PCE remains elevated in the second half of the year, a December rate hike would evolve from a tail risk into a baseline scenario, which would serve as a stress test for risk assets and rate-sensitive sectors currently at elevated levels. Investors need to closely monitor the monthly trajectory of core PCE in the coming months, which will be the key variable in judging which side the Fed's internal balance tips toward.