Fed Signals Another Tightening, ECB Hikes, and Bank of Israel Approaches Next Decision

Three central banks dominate this week's macro narrative: the Fed's hawkish dot plot, the ECB's first rate hike in three years, and Israel's upcoming rate decision on July 6

The global macro landscape this week revolves around two key developments: the Federal Reserve signaling a surprising direction of further tightening, and the ECB delivering its first rate hike in nearly three years. The Bank of Israel is expected to convene in about ten days for its next rate decision.

The Fed Takes a Hawkish Stance

At the FOMC meeting on June 17, the Fed held its benchmark rate unchanged at 3.50%-3.75% for the fourth consecutive meeting. The surprise came from the updated dot plot: the median projection for end-2026 rates rose to 3.8%, up from 3.4% in March. That implies at least one 25-basis-point hike is still on the table this year.

Of the 18 committee projections (new Chair Kevin Warsh did not submit one), nine officials anticipated at least one hike in 2026, eight expected no change, and one projected a cut. Futures markets priced in over 60% probability of a rate hike by year-end.

Macro analyst Lyn Alden framed the situation as the "gradual print" era, where fiscal dominance constrains the Fed's independence. Large deficits and rising debt service costs, she argues, make it difficult for the central bank to tighten aggressively without disrupting Treasury market plumbing.

Europe Tightens

On June 11, the ECB raised its three key interest rates by 25 basis points, the first hike since 2023. The deposit facility rate rose to 2.25%, the main refinancing operations rate to 2.40%, and the marginal lending facility rate to 2.65%.

The move reflects the bank's upward revision of its 2026 inflation forecast to 3.0% (from 2.6% in the previous projection), driven largely by surging energy prices in the context of the Iran conflict. Markets had fully priced the hike, but the ECB's hawkish tone kept the euro supported in the 1.13-1.14 range against the dollar.

Nomura expressed a similar view on the U.S., removing its rate-cut forecasts for 2026, citing persistent inflation from the Middle East conflict and global chip shortages.

Israel: Awaiting the July 6 Decision

Israel's benchmark rate stands at 3.75%, following a 25-bps cut in late May. Inflation is at 1.9%, within the 1%-3% target range. The Bank of Israel's Monetary Committee convenes on July 6 for its next decision.

The shekel traded this week around 2.979 per dollar, reflecting relative stability in the pair as the Bank of Israel maintains a comparatively moderate monetary stance against the tightening bias of the major central banks.

Bond Markets Under Pressure

The 10-year U.S. Treasury yield closed yesterday (Thursday) at 4.40%, while the 2-year stood at 4.09%. The U.S. Dollar Index (DXY) closed around 101.43. These levels reflect the expectation of higher rates for longer, consistent with Goldman Sachs economists who pushed their rate-cut view to at least 2027.

The Bottom Line

Macro markets are experiencing a meaningful shift this week: the Fed has locked into a hawkish stance, the ECB has already raised rates, and the Bank of Israel will soon face its own decision on balancing growth support against global inflationary pressures. The growing probability of additional rate hikes globally is weighing on equity markets, particularly the tech sector that led Wall Street's declines late this week.

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