USD Rates: Divergence between Taylor rule implied and actual FFR
The bond rout continues as inflation fears reign.
Group Research - Econs, Eugene Leow19 May 2026
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The divergence between our modelled version of the Taylor rule for the Fed and the actual Fed funds rate is disconcerting. Notably, this trend started late last year when the Fed was embarking on a series of insurance cuts amidst lackluster labour market data and still-cooling inflation. However, this split between actual and modelled Fed Funds rate has widened even more as the unemployment rate held low even as inflation has spiked to the upside. Based on our measures, the Fed may be one of the most dovish (within the G10) relative to where economic conditions warrant. This probably accounts for why Fed hike pricing remains relatively low compared to peers. Investors are probably keeping hopes that new Fed Chair Warsh will strike a more dovish note. Warsh reportedly prefers looking at trimmed mean gauges but it is not clear that the Fed will embark on such a drastic change in a short period. For what it’s worth, the Dallas Fed 1Y trimmed mean figure stands at a 2.4% in March, compared to core PCE at 3.2% YoY. We think that risks to USD rates remain skewed to the upside even as investors took a pause (on rising oil and yields) when Trump refrained from striking Iran.



Eugene Leow

Senior Rates Strategist - G3 & Asia
[email protected]



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