Market sees U.S. rates on hold through 2026 as data, war and oil keep Fed cautious
Policy outlook: flat rates, data-dependent stance
Market-implied U.S. policy rates are projected to stay broadly flat through the end of 2026, according to an analysis by BNY’s George Velis.
The assessment mirrors recent Federal Open Market Committee (FOMC) discussions, which stress that any change in the federal funds rate will depend on incoming economic data rather than a preset path.
Minutes from the latest meeting show most officials still expect rate cuts if inflation slows as forecast. However, a minority continues to argue that further rate hikes could be required if price pressures remain above the Federal Reserve’s 2% target.
Inflation and jobs data limit room to move
The latest Consumer Price Index report showed headline inflation stuck at 3.4% year-on-year, underscoring the Fed’s difficulty in guiding inflation convincingly back toward its objective.
At the same time, the labor market remains robust. The most recent nonfarm payrolls release reported a gain of 290,000 jobs, while the unemployment rate held at 3.8%. This combination of firm inflation and solid employment leaves policymakers with little immediate incentive to cut borrowing costs.
Market pricing reflects geopolitical and growth uncertainty
Velis noted that current market pricing signals a cautious stance, as traders struggle to assess the scale and duration of the economic fallout from the ongoing conflict.
The analysis suggests the uncertain length of the war is feeding directly into inflation projections and shaping expectations for monetary policy well into early 2027. West Texas Intermediate crude futures have traded above $90 per barrel for the past quarter amid supply disruptions, complicating the Fed’s effort to distinguish temporary conflict-related price shocks from underlying domestic inflation trends.
Scenario: easing conflict, softer growth, potential cuts
In a scenario where tensions ease and part of the disrupted oil supply returns to the market, the report argues that weaker global and U.S. activity could raise the probability of rate cuts.
If oil prices decline and stay lower—though still above prewar levels—this could relieve some inflation pressure and support a gradual shift toward policy easing.
Fed officials split on future guidance
FOMC minutes highlight a divide over how to frame future guidance.
Many policymakers prefer language that preserves room to lower rates if inflation moderates. Others want to keep explicit reference to the possibility of raising the federal funds target range further if inflation proves sticky.
Federal Reserve Governor Lisa Cook recently reinforced the Fed’s data-dependent posture, saying policy is not on a preset course. Her comments contrast with more hawkish remarks from some regional Fed presidents, who have kept the option of additional tightening on the table to ensure inflation is fully contained.
Implications for markets
With rate expectations anchored and shifts in policy tied closely to each new data release, assets that rely on stronger future growth and lower financing costs may face a spell of heightened volatility and constrained price action.
Traders are likely to focus on upcoming inflation readings and labor market reports, as any clear break from the current pattern could trigger a rapid repricing of the rate path beyond 2026.
For deeper context on how rate policy moves crypto, explore our guide on interest rates and Bitcoin.
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