BNY strategists John Velis and David Tam dropped their forecast for two Federal Reserve rate cuts by the end of this year. They now expect the Fed to keep rates unchanged through year-end, with easing delayed into 2027 if oil and other input prices stabilise by then.
The change is linked to ongoing disruption around the Strait of Hormuz and a US labour market that has not weakened as anticipated. They had assumed the strait would reopen before August and that job conditions would soften, but neither has occurred.
Policy Shift Drivers
They state that if Persian Gulf shipping resumes earlier, rate cuts could follow soon after. They also note that, as June approaches, there is little sign of de-escalation by either side.
Under their current labour market view, job growth stays flat or weak without major losses, keeping unemployment between 4.1% and 4.4%. With rising bond yields and the chance of higher inflation, they say the Fed would have limited scope to ease without an increase in unemployment.
Given the new reality of the Federal Reserve remaining on hold, we should adjust interest rate positions immediately. The market has quickly repriced, with futures contracts for the December 2026 Fed meeting now implying only a 15% chance of a cut, down from over 70% just last month. This suggests selling any remaining positions that bet on lower rates and considering strategies that benefit from rates staying elevated, as the 10-year Treasury yield climbs back towards 4.95%, a key resistance level we watched closely in 2025.
The latest jobs report from the Bureau of Labor Statistics supports this hawkish shift, showing nonfarm payrolls adding a meager 55,000 jobs while the unemployment rate held firm at 4.2%. This creates a difficult situation where the economy is too weak to cheer but not weak enough to force the Fed’s hand on rate cuts. With this stagnant labor market, the Fed’s focus remains squarely on inflation driven by input costs.
Positioning For Higher For Longer
This environment is a headwind for equities, so defensive option strategies are now prudent. The uncertainty around a potential rate hike scenario, should inflation persist, has pushed the VIX up to 19.5. We should consider buying put options on rate-sensitive indices like the Nasdaq 100 to hedge against downside risk in the coming weeks.
The ongoing disruption in the Strait of Hormuz remains the key driver of this policy change and should be traded directly. Ongoing tensions have kept Brent crude futures for July delivery trading above $110 a barrel, a level not seen since the supply shocks of late 2025. Bullish positions on crude oil through futures or call options offer a way to capitalize on the sustained geopolitical risk premium.
Higher-for-longer U.S. interest rates make the dollar more attractive relative to other currencies. We see an opportunity in going long the U.S. Dollar Index (DXY) as other central banks may not follow the Fed’s hardened stance. This trade profits from the widening gap between U.S. and foreign interest rate expectations.
