Fed unlikely to cut rates before December, says ING’s James Knightley

The US Federal Reserve may hold off on cutting interest rates until December, as it waits to see how new tariffs and spending plans affect inflation, says James Knightley, Chief International Economist at ING.

While markets are betting on a cut in September, Knightley thinks that might be too soon. “I certainly think they will be cutting before the end of the year,” he said. “But I just think that to get clear evidence that inflation is not more permanent because of these tariffs, means that it may be a December rate cut rather than a September rate cut that the market is currently pricing.”

He pointed out that the Fed is being more careful this time around, especially after misjudging the inflation spike in the past. The focus now is on the monthly inflation prints. “If the number comes in at 0.17% month on month or below, we’re in decent shape. But if it runs hotter than that, we’re going to be moving away from 2% year-on-year run rate. That’s the key threshold.”

The Fed’s wait-and-watch stance is also reflected in market expectations. According to the Chicago Mercantile Exchange (CME) FedWatch Tool, as of July 3, 2025, there is a 94.8% probability that the Fed will keep rates unchanged at the July 30 Federal Open Market Committee (FOMC) meeting. Only 5.2% expect a rate cut, with no participants pricing in a hike.

Unless the labour market starts weakening sharply, the Fed may not feel any urgency to cut rates before the end of the year.

The US labour market remained unexpectedly strong in June, with non-farm payrolls rising by 147,000, well above economists’ forecast of 110,000. The unemployment rate also edged down to 4.1%, the lowest since February, against an expected uptick to 4.3%.

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Knightley warned that the combination of rising tariffs and a growing debt burden could put upward pressure on US bond yields over time.

“I would argue that we could well see bond yield come under upward pressure, because we’re going to see a wall of issuance coming through over the next few years,” he said, adding that foreign investors may pull back as the dollar weakens, leaving domestic buyers to absorb more of the supply.

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For the entire interview, watch the accompanying video

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