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Fed: Rate Cuts Rolling Away

• Pricing for Fed rate cuts in 2026 has been trimmed by ongoing economic resilience and a fairly uncontroversial appointment of Kevin Warsh as the Fed’s next Chair.
• Mean pricing still covers two cuts, close to the BoE, despite both being on hold and some other central banks turning hawkish. Delaying cuts until mid-year isn’t enough.
• We see excess demand and inflation surviving, preventing policy easing. Trump’s Chair can sell this stability. Temporal decay of the dovish skew would also roll rate cuts away.

By Philip Rush

HEM: Feb-26 Views & Challenges

• Policymakers have broadly signalled caution against cutting too far, feeding pricing for prolonged pauses.
• Resilient output, expanding credit, and the UK’s unbroken excess inflation problem should prevent further cuts.
• Risks from rising unemployment eased with stabilisation after a bad round of releases during December.

Data-Driven Fed Holds the Line

• The Fed holds rates at 3.50%-3.75% as expected, pausing after three cuts. Two dissenters sought 25bp reductions, highlighting debate on easing timing.
• Inflation remains the key hurdle: Core PCE ~2.8-3.0%. Downside risks from unemployment were removed, delaying cuts.
• Two cuts are expected in H1 2026 (April-June), but tariff pass-through and wage pressures risk fewer/delayed cuts; labour weakness could accelerate easing.

US Inflation Resumes Without Payback

• US inflation resumed its monthly trend in headline, core, and underlying services after nonsensical methodological noise around the shutdown, including non-collection itself.
• Payback from late sampling in November didn’t have an apparent inflationary effect, perhaps because the gap between collections didn’t leave long for other prices to rise.
• Surprises are skewing lower, but inflation is stuck above the target, so there isn’t a compelling case to cut again. We still expect the Fed to hold rates in January.

By Philip Rush