Policy Normalisation Outlook
TD Securities expects a more favourable inflation path by the third quarter, based on a month-on-month profile that would allow policy normalisation to restart. They project three 25 bp cuts, occurring quarterly from September 2026 through March 2027. They said risks are rising that the Fed delays easing this year due to geopolitical uncertainty and its effect on energy prices. They said developments in the Middle East conflict will influence the Fed’s options in the coming months. The Federal Reserve is holding interest rates steady for now, but its patience on inflation seems likely to expire by the end of the summer. We are watching for an incoming oil shock to temporarily push up headline inflation, especially with Brent crude already trading over $85 a barrel. This concern is heightened by the recent decision from OPEC+ to extend production cuts of 2.2 million barrels per day, which is tightening global supply. Our base case remains that the Fed will be able to start cutting rates by 25 basis points in September 2026, followed by two more quarterly cuts. However, the market is reflecting growing uncertainty, with Fed funds futures now pricing in less than a 50% chance of a rate cut before the fourth quarter. This highlights the rising risk that geopolitical events could force the central bank to postpone easing into late this year or even 2027.Preparing For Higher Volatility
This environment of uncertainty suggests traders should prepare for higher volatility in the coming months. Options strategies on interest rate futures, like those tied to SOFR, could be effective for positioning for sharp moves as the Fed’s summer deadline approaches. The discrepancy between the Fed’s goal and the reality of energy prices creates a potential for significant market repricing. We remember how the stubborn inflation of 2022 and 2023 forced the Fed into an aggressive hiking cycle, and they are wary of easing policy too soon. The latest Consumer Price Index reading showing inflation at a sticky 3.2% reinforces the case for the Fed to wait for more conclusive data. This stickiness suggests that any aggressive bets on early rate cuts carry considerable risk. Create your live VT Markets account and start trading now.
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