ABN AMRO’s Senior US Economist Rogier Quaedvlieg argues that US growth has slowed sharply outside AI-related activity, with near-zero job creation and downgraded GDP. Tariff-driven and Oil-related price pressures are pushing PCE inflation forecasts higher, while the Federal Reserve is now expected to stay on hold until December 2026 before starting gradual easing in 2027, as risks to core inflation remain skewed higher.

Fed pause extended as inflation risks rise

"Based on our assumptions on oil price developments, we expect PCE inflation to rise to 3.6%, peaking in the second quarter of this year. We have limited concern about second order effects from the energy shock, given the K-shaped economy, and the above mentioned slowdown."

"Any second round effects will however be difficult to identify, given already re-accelerating inflation, with recent PPI readings showing significant price pressures throughout the economy. These are mostly supply-driven due to tariffs and labour shortages in select sectors, but there is a demand component attributable to the investment and consumption patterns associated with the AI build out."

"We therefore expect a passive Fed, which does not fully ‘look-through’ the inflation, and refrains from the easing as it were poised to do before the conflict started. Chair Powell, in principle, has one meeting left in which he is unlikely to deviate from course, and his successor, Kevin Warsh, is likely to steer for consensus on not hiking."

"We now see the Fed on hold until December of this year, when the fog starts to clear and the FOMC has convinced itself of limited second order effects. We subsequently see further policy normalization with two quarterly 25 bps cuts in March and June 2027."

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