Fed: Holding pattern extends into 2027 – TD Securities

TD Securities economists Oscar Munoz and team revise their Fed outlook, now projecting no rate cuts in 2026 as persistent inflation pressures from the Iran conflict, elevated Oil and strained supply chains delay disinflation. They still anticipate policy easing in 2027 back toward a 3% neutral rate, but warn the FOMC’s bar for cuts is rising and hawkish risks remain.

No cuts as inflation risks linger

"We are revising our Fed call and no longer expect rate cuts in 2026. With the Iran conflict in a stalemate, oil prices still high, and supply chains stressed, we no longer see inflation progress as feasible this year. Additional easing in 2027 is still our base case once impacts from Iran subside."

"We no longer look for rate cuts this year, as the inflation calculus will turn more problematic over the next few months. We remain optimistic regarding policy easing in 2027 (75bps starting in March), as we continue to expect the Fed to eventually bring policy back to our estimate of neutral at 3%. However, we cannot discard the possibility of the Fed staying on hold for even longer with numerous risks threatening the inflation outlook."

"Absent an unexpected deterioration in the labor market or an outside shock that rapidly tightens financial conditions, the Fed will not ease policy this year. The June FOMC meeting is increasingly becoming the likely platform for the Committee to signal its change in guidance. We expect this to be the case despite Kevin Warsh entering as Fed Chair."

"Likewise for the dot plot. We now expect the median Fed official won't pencil in rate cuts for 2026. Also, as noted before, we would not be surprised to see a few participants projecting hikes in 2027."

"The potential for the materialization of downside growth risks is a key reason why we see a rate cut as the more likely next move for the Fed vs a hike."

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