Fed: Level yield curve and rate reductions based on economic data – BNY

BNY’s Perspective on US Policy Rates and Economic Uncertainty

John Velis from BNY observes that market expectations for US policy rates remain largely unchanged through late 2026, highlighting the prevailing uncertainty regarding economic growth, inflation trends, and the ongoing conflict. He shares the viewpoint of many Federal Open Market Committee (FOMC) members who anticipate rate reductions if inflation subsides and the conflict de-escalates, though he also notes that some policymakers still consider further rate increases possible should inflation persist above target levels.

Market Expectations and FOMC Outlook

According to Velis, projections based on market data suggest that policy rates are expected to stay steady until at least early 2027. With the future of economic growth and inflation still unclear due to the protracted conflict, these market assumptions appear justified. The unpredictable duration and consequences of the war make it difficult to forecast, and the market’s cautious stance reflects this uncertainty.

Minutes from the FOMC indicate that a significant number of members anticipate rate cuts if inflation falls in line with their projections—a sentiment Velis and his team share.

Should the conflict conclude and crude oil supplies partially recover, the resulting economic strain is likely to impact an already fragile labor market. This scenario could prompt rate reductions, provided oil prices have reached their peak and begin to decline, even if they do not return to levels seen before the war.

FOMC members who foresee a future decrease in interest rates are generally relying on the expectation that the conflict will ease and inflationary pressures will subside as a result.

However, the FOMC minutes also highlight that some participants believe it is important to keep options open for both raising and lowering rates. They argue that if inflation remains above the target, further increases to the federal funds rate could still be warranted.

(This article was produced with assistance from an AI tool and subsequently reviewed by an editor.)