Friday's employment report, which significantly exceeded consensus estimates, has prompted a reassessment of monetary policy expectations among market participants. Macquarie Group economists now see the next move by the Federal Reserve as a rate hike, with a baseline projection for the first quarter of 2027.
David Doyle, head of economics at Macquarie, stated in a research note that the firm's outlook for the Federal Open Market Committee remains unchanged following the jobs data. "We see the next move as a hike with our baseline timing being in 1Q27," Doyle wrote. He added that risks are now tilted toward an earlier tightening, with markets already pricing in a potential hike in the fourth quarter of 2026.
The Fed, now under Chair Kevin Warsh—who succeeded Jerome Powell on May 22 after President Donald Trump's nomination—has kept its policy rate steady at 3.5% to 3.75% since its last cut in December 2025. The CME FedWatch tool indicates a 98.2% probability that rates will remain unchanged at the upcoming June 16-17 FOMC meeting, with only a 1.8% chance of a cut to 3.25%-3.5%.
Thierry Wizman, global FX and rates strategist at Macquarie, noted a shift in market sentiment following the jobs report. "Up until Friday, traders were willing to enjoy the promise of strong growth without the prospect of higher real interest rates," Wizman said. "But after Friday, the high growth narrative, which drove stocks higher especially, seems to have given way to a rates-driven narrative."
Wizman elaborated that in this new environment, "good" economic news may push real interest rates higher, potentially weighing on elevated stock market valuations. This dynamic could challenge advisors who have positioned client portfolios for continued equity gains amid a low-rate backdrop.
Analysts at Charles Schwab have echoed the view that Warsh is unlikely to deliver rate cuts soon, citing persistent inflation. The CME FedWatch tool also shows negligible odds of a cut in 2026, while the probability of a hike emerges later this year and into 2027.
For financial advisors, the prospect of a rate hike—rather than a cut—represents a significant shift in the macroeconomic landscape. As wealth advisors navigate the 'vibecession' where client sentiment diverges from strong data, the potential for higher rates could further complicate portfolio construction and client communication.
Macquarie's Doyle emphasized that FOMC rhetoric is likely to continue moving away from a cutting bias and toward a hiking bias in the coming weeks. This aligns with the broader market repricing, where the narrative has pivoted from growth optimism to rate sensitivity.
Advisors may need to reassess their fixed-income allocations and equity exposure as the rate outlook shifts. The lag in portfolio assumptions relative to the policy-driven environment could leave some clients exposed to duration risk or overvalued growth stocks.
With the next FOMC meeting on June 16-17, all eyes will be on Warsh's first policy decision and the accompanying statement for clues on the timing and magnitude of any potential tightening. The market's focus on rate hikes, rather than cuts, marks a notable departure from the expectations that prevailed for much of 2025.
