UOB’s Alvin Liew notes that stronger-than-expected US payrolls and higher Oil prices have sharply reduced expectations for Federal Reserve rate cuts in 2026. Liew highlights market pricing of a near-certain pause at the June Federal Open Market Committee (FOMC) and even some risk of a hike by December 2026. Liew now projects an extended policy pause through 2026 before easing resumes in 2027.

Robust jobs data reshape Fed expectations

"The unexpectedly robust May payrolls report, combined with upward revisions to prior months and ongoing inflation concerns amid elevated crude oil prices, have all but eliminated market expectations for near-term Fed rate cuts."

"While we began the year with a rate cut bias, market expectations have markedly shifted since the outbreak of the US-Iran war that drove energy costs higher."

"Various Fed officials have turned hawkish in their policy outlook, most recently Fed Governor Waller (who previously was viewed as one of the more dovish Fed policymakers)."

"According to Bloomberg WIRP, the probability of a Fed pause at the upcoming June FOMC meeting is near certain, while the case for any rate cut in 2026 has substantially diminished, with a 40% chance of a rate hike by Dec 2026."

"We expect an extended period of policy pause through 2026 before the Fed resumes easing in 2027 (with two rate cuts in late 2Q27 and late 4Q27)."

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