Fed: Extended pause before late 2026 cut – UOB

⦿ Executive Snapshot

• What: UOB's Alvin Liew predicts an extended pause in Federal Reserve policy until late 2026 with only one expected rate cut.
• Who: Alvin Liew, UOB, Federal Reserve (Fed).
• Why it matters: The forecast reflects ongoing inflation pressures and potential delays in easing monetary policy, impacting economic outlook and market expectations.

⦿ Key Developments

• UOB now expects the Fed to hold rates steady throughout 2026, with just one 25-basis-point cut anticipated in the fourth quarter.
• The previous forecast anticipated two cuts in the second and third quarters of 2026, indicating a shift in economic expectations.
• The terminal federal funds target rate is now projected to be 3.50% by the end of 2026, up from an earlier estimate of 3.25%.

⦿ Strategic Context

• The Fed's decision-making is influenced by persistent inflation and energy price volatility, particularly related to the Middle East conflict, which could affect economic stability.
• Historically, the Fed's monetary policy adjustments are closely tied to labor market conditions and inflation trends, making this pause significant in the context of economic recovery.

⦿ Strategic Implications

• The immediate consequence may include increased market volatility as investors adjust their expectations regarding potential rate cuts and economic growth.
• Long-term implications could affect borrowing costs and consumer spending, as prolonged high rates could impede economic recovery and job growth.

⦿ Risks & Constraints

• A potential risk involves regulatory and geopolitical factors, particularly if energy prices surge due to ongoing conflicts, complicating the Fed's easing strategy.
• Competition from other economies may arise if the US maintains higher interest rates longer than anticipated, impacting capital flows and investment decisions.

⦿ Watchlist / Forward Signals

• Investors should monitor energy price movements and geopolitical developments in the Middle East for signals that could delay the anticipated rate cut.
• Upcoming economic data releases related to inflation and labor market conditions will be critical in assessing the likelihood of the Fed's easing timeline.