TD Securities, led by Oscar Munoz and Eli Nir, reports that the Federal Reserve (Fed) has shifted hawkishly and is expected to keep policy rates on hold through 2026 and 2027. The Federal Open Market Committee's (FOMC) latest projections highlight elevated inflation risks, with nine participants penciling in 2026 hikes. Despite slightly dovish rhetoric from Chair Warsh, the analysts see a higher bar for cuts and a greater likelihood of future hikes.

Hawkish shift and extended pause

"Overall, Warsh did sound slightly dovish in his characterization of the stance of policy — but the bar has been raised for rate cuts, and we no longer expect any move in the policy rate in 2026 and 2027. The FOMC is squarely focused on inflation, and labor market stabilization amid two supply shocks limits the need for policy accommodation. If the Fed were to eventually move, it would now more likely be a hike than a cut."

"We revised our Fed call and no longer look for rate cuts in 2027. We now expect the Fed to stay on hold over our forecast horizon."

"Policy guidance skewed significantly hawkish. Nine participants penciled in hikes for 2026, and the SEP underscored that the clear and present danger for the Fed's dual mandate is rising inflation risks. The post-meeting statement was dramatically reduced to a bare-bones description of the Committee's policy action — with an emphasis on inflation currently being away from target."

"We expect the Fed to remain on hold over our forecast horizon. Inflation will remain high for the rest of the year, and the labor market has stabilized, allowing the FOMC to shift focus to its inflation mandate. If the Fed were to move this year, we now believe that move is more likely to be a hike than a cut."

"There were two clear takeaways from the FOMC last week: the Fed is shifting hawkishly and formal forward guidance is over."

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