TD Securities economists, led by Oscar Munoz, have changed their US Federal Reserve forecast and now expect no interest rate cuts in 2026. They cite persistent inflation pressure linked to the Iran conflict, high oil prices, and strained supply chains, which they say slows disinflation.
They still project policy easing in 2027, aiming towards a 3% neutral rate. They estimate 75 bps of cuts starting in March 2027, but note the threshold for cutting is increasing and the Fed could stay on hold for longer.
They expect no easing “this year” unless there is an unexpected weakening in the labour market or a shock that rapidly tightens financial conditions. They also expect the June FOMC meeting to be a point where the committee could signal a change in guidance, including under Kevin Warsh as Fed Chair.
They now expect the dot plot median to show no cuts pencilled in for 2026. They add that some participants could project hikes in 2027, while still viewing a cut as the more likely next move than a hike due to downside growth risks.
We are revising our view and no longer expect any Fed rate cuts in 2026. The market is quickly repricing this reality, with the December 2026 SOFR futures contract now yielding around 5.4%, erasing the 50 basis points of cuts that were priced in just a few months ago. This “higher for longer” stance is becoming the main scenario we need to trade around.
The primary strategy now involves selling near-term upside calls on SOFR futures, as the Fed seems firmly anchored. However, with the MOVE Index stubbornly holding above 115, we are buying far out-of-the-money calls for late 2026 or early 2027 to hedge against a hawkish surprise. Options markets are currently pricing in a small but not insignificant 15% chance of a rate hike by year-end, a risk we cannot ignore.
For equity index derivatives, this outlook suggests a defensive posture, particularly for the rate-sensitive Nasdaq 100. The index has already seen a 4% pullback since the last inflation report, and we anticipate more pressure. We are adding to protective put positions and selling out-of-the-money call spreads on the QQQ ETF to capitalize on range-bound or downward price action.
The stalemate in the Iran conflict continues to be a major factor, keeping WTI crude oil prices elevated above $95 a barrel. This persistent energy cost is feeding directly into inflation expectations, with the Global Supply Chain Pressure Index also ticking up last month for the first time in a year. Consequently, owning upside calls on energy stocks or oil ETFs remains a valid inflation hedge.
Looking back at 2025, we remember how the consensus view was for significant easing throughout 2026. The Fed’s own dot plot from December 2025 had shown a median expectation of at least three rate cuts for this year. That entire narrative has now been invalidated by stubborn inflation data, teaching us a valuable lesson about fighting the Fed’s hawkish pivot.
