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US Fed expected to hold interest rates steady through 2026
17 May 2026

The US Federal Reserve is expected to change its easing bias at the next Federal Open Market Committee (FOMC) meeting and adopt a tightening stance through 2026.

According to Elara Securities, there is a 20% chance of a 25 basis points hike in December if the Strait of Hormuz stays closed and energy prices continue to rise.

Revised predictions due to inflationary pressures
Economic outlook

Elara Securities has revised its previous prediction of three 75 basis points rate cuts in CY26.

The revision comes amid rising inflationary pressures from the US-Iran conflict, even as the labor market remains steady but softening.

The brokerage believes that inflation is on an upward trajectory and the Fed's 2% target is no longer achievable.

Potential shift in Fed's bias
Policy adjustment

Elara Securities predicts the FOMC will remove its easing bias from policy minutes going forward.

It expects a shift toward a tightening bias if inflation remains 80-100 basis points above target for an extended period.

In such a scenario, the Fed would show "higher tolerance for softer labor market (unless the unemployment rate is >4.8%)."

Revised PCE forecasts amid rising energy prices
Economic projections

Elara Securities has raised its US core Personal Consumption Expenditures (PCE) forecast to 2.9% Q4/Q4, from an earlier estimate of 2.6%.

The headline PCE is projected at 3.0-3.5%.

This revision is attributed to tariff-related pass-through and rising energy and food prices, though Elara doesn't expect a runaway inflation scenario due to the lack of fiscal transfers seen in 2022.

Unemployment and GDP projections unchanged
Market trends

Despite the revised forecasts, Elara Securities maintains its unemployment rate projection at 4.6% for CY26.

This is due to tighter financial conditions and reduced labor demand from automation.

The brokerage also kept its CY26 GDP forecast at 2.2% Q4/Q4, noting potential softening of consumer demand and business spending due to supply chain bottlenecks but possible upside from US energy exports amid the Middle East conflict.