Rate hikes would be a mistake

We believe the US Federal Reserve (Fed) will not hike rates — and that it would be a mistake to do so. Despite market consensus pricing in two rate hikes, the U.S. economy is on a structurally weakening path. Unless the Fed is willing to amplify the very slowdown it is trying to avoid, rate cuts — not hikes — will be back on the agenda before long. 

Over the past year, we have consistently argued that underlying U.S. growth was weaker than headline data suggested. Our view has not changed. 

Consumer spending drives roughly two-thirds of the U.S. economy, making the health of household finances a matter of critical importance. The personal savings rate tells a worrying story: Americans have been steadily drawing down their financial buffers throughout 2026 — from 4.5% in January to just 2.6% by April, well below the long-run average of 8.4%¹. 

Put simply, consumers are spending more than they are earning in real terms. That is not a sign of confidence — it is a sign of strain. Once savings are depleted, spending will have to adjust. When it does, the slowdown could be abrupt. 
 

The labour market tells a similar story of gradual but persistent deterioration. The headline monthly jobs numbers tend to attract the most attention, but it is the revisions — published quietly months later — that tell the truer story. 

After benchmark revisions, the U.S. economy added an average of just 9,600 jobs per month in 2025 — barely above zero, and a fraction of the ~377,000 monthly average seen in 2022. In fact, 2024 and 2025 saw the most severe and consistent downward revisions outside of the pandemic period. The labour market was already on fragile footing before the Middle East conflict added fresh uncertainty in early 2026. 

For the average worker, this translates into fewer opportunities, slower wage growth, and greater job insecurity. And while AI-led² productivity gains remain a powerful market narrative, they have yet to translate into broad-based income growth — particularly for younger workers entering a low-hire, low-fire environment. 

As job opportunities fall short of expectations, consumer spending will inevitably adjust. The only question is timing. 

The inflation episode of 2022 inflicted lasting damage on household purchasing power that has never fully healed. Back then, surging shelter costs and pandemic-era stimulus — combined with pent-up demand — drove prices sharply higher. Most consumers absorbed those increases, even if painfully. 

Today, savings are thin, real incomes are under pressure, and energy prices have risen sharply again following the Middle East conflict. How will the average consumer in a much weaker position absorb another round of price increase?

Rather than fuelling inflation persistence, this squeeze on household budgets is itself a disinflationary force — constrained consumers simply spend less. 
 

The Fed finds itself in familiar territory. Having once underestimated inflation, it now risks making the opposite error — underestimating the drag from a weakening consumer, and holding rates too high for too long. 

Should the Fed proceed with rate hikes, it would be tightening into a deteriorating economy: one where savings are nearly exhausted, job creation has slowed to a crawl, and real wages are falling. That is not a backdrop that calls for more restriction. The question is not whether rate cuts will eventually return to the table — it is how much damage will have been done by the time the Fed acts.

Source: First Sentier Investors, Bloomberg as at 31 May 2026

1. Source: Bloomberg. As of April 2026.

2. AI refers to artificial intelligence