Fed: Extended pause before late 2026 cut – UOB

UOB’s Alvin Liew expects the Federal Reserve (Fed) to keep policy on hold for an extended period in 2026, with only one 25-basis-point cut pencilled in for 4Q26. The shift from earlier expectations of two cuts reflects persistent inflation pressures and delayed labour weakness. Elevated Oil prices and Middle East risks could further postpone easing into 2027.

Fed seen delaying easing into late 2026

"We now expect an extended period of pause in 2026 before the Fed resumes easing policy with one rate cut in 4Q26, still keeping the easing bias for Fed policy. Labour weakness may emerge as higher energy costs curb hiring, while persistent energy price spikes may delay or complicate cuts."

"This represents a change from our previous forecast of two cuts in 2Q26 and 3Q26 but we maintain our view of an easing stance for Fed policy. The revised timing reflects our expectation that inflation pressures will only begin to taper meaningfully in late 2H26, while weakness in the US labour market emerges more clearly over the same period."

"Under this revised path, the terminal federal funds target rate is now expected to be 3.50% by end 2026, compared with our earlier forecast of 3.25%. That said, risks remain firmly skewed to smaller chances for easing."

"Investors will be on heightened alert for the possibility of further delays to the first rate cut—or even an inability to ease in 2H26 altogether—should energy prices rise sharply and persistently due to an escalation or prolongation of the Middle East conflict. A broader oil related price spillover across the CPI basket would materially complicate the inflation outlook, raising the risk that the anticipated year end cut is pushed into 2027."

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