Northeast Securities Sees One More Fed Hike in 2026, Favors Commodities

The U.S. Federal Reserve has implemented its anticipated September interest rate hike, and officials are signaling one more increase is likely before the end of the year. According to a research note from Northeast Securities, the central bank's updated dot plot suggests policymakers expect to hold rates steady for a period after a final 2026 hike, with rate cuts not anticipated until 2028.

A 'Precautionary' Hike

Northeast Securities characterized the Fed's move as a "precautionary" hike, noting that it comes at a time when the economy is not yet overheating. The decision was based on several factors cited by Fed officials, including resilient domestic spending, strong productivity growth, robust capital investment, and healthy credit flows.

Analysts at the firm noted that after previous rate cuts totaling 175 basis points, the current policy rate of 3.75% may no longer be restrictive for the U.S. economy. This view is supported by a broad-based cyclical recovery over the past year.

Gradual Tightening, Not a Rapid Cycle

While the risk of a December rate hike should not be underestimated, Northeast Securities does not foresee the beginning of a continuous, rapid tightening cycle. The firm's analysis points to limited potential for endogenous inflation, based on current wage growth and real estate market conditions.

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Instead, analysts believe the current policy path resembles the 2016 cycle, which involved a small rate increase followed by a sustained pause. A more aggressive, sustained hiking cycle is not expected to begin unless the economy shows continued strong acceleration into the second half of 2027.

Asset Allocation Outlook

Against this monetary policy backdrop, Northeast Securities outlined its views on several asset classes:

• Commodities: The firm is most bullish on commodities, particularly copper. It argues that copper's primary price gains often occur during hiking cycles, as the underlying cause for the hikes—an overheating economy—is the same catalyst that drives copper prices higher.
• Equities: Similar to commodities, equities are expected to perform well as long as the economy remains strong and the Fed avoids a high-intensity, continuous hiking cycle. However, should such a cycle begin in late 2027, it could trigger a prolonged period of pressure on equity valuations.
• Bonds & Currencies: For the 10-year U.S. Treasury yield, analysts believe 5% will not be the ceiling in the long term, despite potential short-term suppression from Treasury Department intervention. For the U.S. dollar, while also facing short-term pressure, a bearish stance is not advised given the backdrop of rising Treasury yields.