Fed: Growth resilience and rate path under energy shock – NBC

National Bank of Canada’s (NBC) Jocelyn Paquet argues that despite the Middle East conflict and higher Oil prices, the U.S. economy should maintain solid growth, with GDP seen at 2.5% in 2026 and 2.1% in 2027. The bank still projects two Federal Reserve rate cuts this year, but acknowledges rising risks that policymakers delay easing as inflation stays above target.

Fed outlook tied to growth resilience

"...we believe that the conflict will still have a negative impact on growth, particularly due to falling foreign demand, which will weigh on exports. Another factor to consider is a more restrictive interest rate structure. Rising oil prices have already led to an increase in long-term interest rates and could also translate into a less accommodative monetary policy."

"Although we are maintaining our forecast of two rate cuts by the central bank this year for the time being, our concerns about the possibility that policymakers will remain on the sidelines have also increased. In theory, the Fed should ignore price surges caused by a supply shock, but the reality may be different given that inflation is already above the 2% target—and has been for nearly five years—and that policymakers will try to avoid making the same mistake they made four years ago when they underestimated the effects of another supply shock, caused by Russia's invasion of Ukraine."

"The improvement in employment that we anticipate for the second half of the year should allow consumption to continue to grow at a sustained pace in the coming months. This expansion, combined with solid investment spending, translates into GDP growth of 2.5% for the year as a whole in our baseline scenario, a slightly less robust forecast than the one we presented before the outbreak of hostilities in the Middle East. For 2027, we expect growth of 2.1%."

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