RBC Economics Senior Economist Claire Fan notes only minor changes to the U.S. outlook, with a slightly lower near-term unemployment forecast but no change to the 4.5% average for 2026. Despite lingering tariff-related inflation risks and delayed data, the Federal Reserve is expected to keep the Fed funds range at 3.5%-3.75% through 2026, maintaining a bias toward potential future cuts.

Fed expected to stay on hold

"Last month, we explained how upside U.S. GDP growth surprises in the second half of 2025 have come entirely from higher productivity growth rather than job/hours expansion. Still, concerns about deterioration were eased by signs of stabilizing labour markets in early 2026. We lowered our near-term unemployment rate forecast slightly, but expect no change in the 4.5% annual average for 2026."

"Crucially, we continue to operate in reduced visibility with the latest partial U.S. government shutdown delaying annual benchmark population adjustments (to data underlying the unemployment rate), and January’s Consumer Price Index data. Repeated reports of price increases among business surveys left us comfortable with our view that core goods inflation will heat up more meaningfully into Q2."

"We expect the Fed to stay on hold in 2026, but its ongoing bias will be towards leaving the door open for future rate cuts from current “modestly restrictive” levels. The nomination of Kevin Warsh for FOMC Chair has mollified concerns about Fed independence, but will introduce new communication styles in June when Warsh presumably takes over from Jerome Powell."

"The Fed held rates steady in January, clearly back in a wait-and-see, meeting-by-meeting stance. It was tough to discern which way Chair Powell was leaning from his comments. He described rates as “loosely neutral or somewhat restrictive,” and confirmed that previous cuts should be sufficient to address concerns around both sides of their mandate. We expect the Fed funds range will remain at 3.5%-3.75% through 2026."

"That said, uncertainty surrounding U.S. protectionist trade policy linger, and the lagged effects of tariffs are still very much in play. An imminent U.S. Supreme Court ruling on the legal status of IEEPA tariffs remains a key source of volatility to our forecast, as we seek clarity on tariff pass-through (with reduced data visibility) tcore goods inflation that’s still expected to rise into Q2."

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