BNY strategists John Velis and David Tam argue that resilient United States (US) data and likely elevated inflation prints make it harder to justify Federal Reserve (Fed) rate cuts this year. Their base case still assumes two cuts in Q4 2026, contingent on a reopening of the Strait of Hormuz and a weaker labor market, both of which they expect could materialize by the end of Q3.

Conditional path to late-2026 rate cuts

"The last two weeks’ worth of U.S. macro data showed an economy that is not yet feeling acute pressure from the shocks generated by the Iran conflict. This includes a solid labor market print at the end of last week. Given the likelihood of elevated inflation readings (CPI on Tuesday and PPI on Wednesday), the case for eventual rate cuts this year looks increasingly difficult to sustain."

"We have long argued that for our two-cut outlook (in Q4 2026) to be valid, it would require a reopening of the Strait of Hormuz, a prospect that still looks unlikely in the short-term. If it eventually does reopen before the end of this summer, we still think that receding oil prices in such an event would allow the Fed to concentrate on the jobs side of its dual mandate. Of course that would require the jobs market to weaken alongside, something that doesn’t look likely in the short term."

"Nevertheless, we still think both of these things – a reopening of the Strait and a weaker labor market – can manifest by the end of Q3, prompting the Fed to move to a more dovish stance. The dissents in the April FOMC were not on rate policy, but rather on the language in the statement, indicating a desire to move to a more explicit expression of two-way risk to rates."

"The jobs data weren’t unequivocally strong. Establishment survey data for April showed an increase of 115,000 jobs. The household survey indicated an increase of 134,000 unemployed persons alongside a decline of 226,000 employed people."

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