BNY strategists John Velis and David Tam have abandoned their call for two Federal Reserve rate cuts this year, citing persistent disruption in the Strait of Hormuz and a labor market that has not weakened as expected. They now see the Fed on hold through year-end, with further easing delayed into 2027, conditional on Oil and input prices stabilizing.

Policy easing delayed toward 2027 horizon

"Our call for two cuts by the end of this year is very much in doubt as it rested on two outcomes. First, we assumed the Strait of Hormuz would open before August; second, we assumed a weakening labor market. With the former looking increasingly dim and the latter not yet materializing, we’ve revised our outlook."

"We now see the Fed on hold for the rest of the year and have pushed further easing into 2027, assuming oil and other key input markets will begin to stabilize by then."

"We retain our view that if shipping from the Persian Gulf resumes sooner, rate cuts would follow not long after. However, we recognize that now – almost into June – there is little sign of a climbdown by either side."

"If labor market conditions remain in their current equilibrium – moribund or even flat job growth, but no significant losses – the unemployment rate will remain steady between 4.1% and 4.4%. Absent a pickup in the unemployment rate, and in the face of rising bond yields and prospects for a further upside to inflation, the Fed cannot move toward easing."

"In some ways, our revised outlook reflects a midpoint between two scenarios: rate hikes, if inflation keeps rising while jobs hold steady; and the scenario we held until today – falling oil prices, easing inflation expectations, and a deteriorating labor market – which had pointed to cuts."

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