The US Federal Reserve is anticipated to keep rates steady due to lingering inflation risks stemming from the US-Iran conflict, as per a report by Elara Capital. The report had initially projected three rate cuts totaling 75 basis points in CY26 but now suggests a 20% chance of a 25-basis point increase in December 2026 if the Strait of Hormuz remains shut until September, leading to further spikes in energy prices and core personal consumption expenditures inflation. The report noted a shift in the labor market dynamics, expecting a gradual softening moving forward.
On the growth outlook, risks are deemed moderate and are expected to manifest with a delay of at least a year, making them less likely to be a focal point for the Federal Open Market Committee (FOMC) in CY26. The report highlighted the potential impact of the US-Iran conflict on energy prices, foreseeing a possible slowdown in consumer demand and business spending due to supply chain disruptions. It also mentioned that tariffs, coupled with increases in energy and food prices, are likely to sustain elevated and persistent inflation levels.
The report does not foresee a scenario of runaway inflation at present, attributing this to the absence of fiscal transfer payments supporting private demand, similar to those seen in CY22. Global leaders have raised concerns about the energy shortage resulting from the Iran war and its broader economic ramifications. The Asian region, in particular, faces challenges due to its heavy reliance on energy and essential supplies from the Gulf.
