USD: Fed cuts repriced on higher inflation – ING

ING’s James Knightley notes that expectations for Federal Reserve easing in 2026 have been reduced as higher near-term US inflation and resilient growth make early rate cuts less likely. ING now sees the Fed cutting in September and December, while upcoming CPI, PCE and GDP data will shape how far markets continue to price out Dollar-negative policy easing.

Fed path repriced with data focus

"Expectations for how far the Fed will cut the policy rate in 2026 have moved from 60bp ahead of the military operations in Iran to 40bp currently. Higher near-term inflation in an environment of economic resilience does indeed make near-term rate cuts look less probable. We have pushed back the timing of when we see the Fed cutting rates from June and September to September and December. While higher energy costs are inflationary, it also puts more pressure on consumer finances and can ultimately be demand destructive, which will push core inflation pressures lower over the medium to longer term."

"Feb CPI (Wed): We're above consensus for CPI and that might nudge the market further into pricing out the possibility of rate cuts. Energy prices are the focus right now for markets, but that will be a March CPI story. Instead, we still see some lingering upward pressure from tariffs on goods prices within the February print. We will also see the January core PCE deflator, which, given the January PPI and CPI reports, points to a 0.4% increase, but this is obviously a month behind next week's CPI data, so it should not be as impactful."

"4Q GDP revisions (Fri): Likely to show little change from the initially reported 1.4% annualised print. While consumer spending and business capex were firm, it was the federal government spending side that held growth back due to the six-week-long government shutdown. Also, watch the trade balance. Imports are rising strongly again and this will be a drag on 1Q growth. It also implies more tariff revenues that we still suspect will add to price pressures in the economy."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)