Investment bank Nomura has updated its forecast, now expecting the U.S. Federal Reserve to begin cutting interest rates later than previously thought.
This shift in timing is primarily a response to the Fed's own messaging. At its March meeting, the central bank signaled a clear "patient" stance, emphasizing it needed "greater confidence" that inflation was sustainably returning to its 2% target before it would consider easing policy. This cautious tone effectively pushed back market expectations for an early rate cut.
The decision to wait is supported by recent economic data. First, while inflation has been cooling, it remains stubborn. Key metrics like the Core Personal Consumption Expenditures (PCE) price index, the Fed's preferred inflation gauge, are still hovering around 3% year-over-year. Progress has been made, but it's not yet the convincing, consistent decline the Fed wants to see.
Second, a new geopolitical shock has complicated the picture. Recent attacks in the Middle East have caused oil prices to surge, with Brent crude briefly climbing above $116 a barrel. This creates a risk of renewed inflation, particularly in energy and transportation costs, and introduces a stagflationary threat—a difficult combination of slowing growth and rising prices. This has raised the bar for the Fed to cut rates soon.
Finally, while the labor market is showing some signs of cooling, with a slight rise in unemployment, the Fed has made it clear that its primary focus remains on inflation. Officials seem willing to wait for more definitive signs of disinflation rather than cutting rates pre-emptively to support the job market.
So, what does this delay mean in practice? By pushing the cuts from a June/September schedule to a September/December one, the average interest rate for 2026 will be slightly higher. This implies a subtly tighter financial environment for a longer period, keeping borrowing costs elevated for consumers and businesses. It also ensures the real policy rate (the interest rate minus inflation) remains positive, which is a key part of the Fed's strategy to tame price pressures.
- Basis Points (bps): One basis point is equal to 1/100th of 1%, or 0.01%. A 25 bps cut means a 0.25 percentage point reduction.
- Core PCE: An inflation measure that excludes volatile food and energy prices, which the Fed uses to see the underlying inflation trend.
- Stagflation: A period of slow economic growth and relatively high unemployment—or economic stagnation—accompanied by rising prices (i.e., inflation).