Fed: Flat curve, late-2026 cuts possible – BNY

BNY strategist John Velis expects the Federal Reserve (Fed) to leave rates unchanged at the April Federal Open Market Committee (FOMC) meeting and provide limited forward guidance, reflecting uncertainty around inflation and the Iran conflict. He notes that market pricing shows almost no rate moves through 2027, with inflation expectations contained. Velis argues this backdrop could eventually give the Fed room to cut rates in late 2026 if the labor market weakens.

Fed on hold as markets stay flat

"We expect no action on Wednesday at what is very likely to be Fed Chair Jerome Powell’s last meeting as FOMC chair, with uncertainty pervading and the Iran conflict still far from resolution. Forward guidance will also be scarce given the inability to form high conviction views on the inflation outlook."

"The general impression, then, is that market participants have not priced lasting inflation from the Strait of Hormuz closure. This allows the Fed to relax on the short-term inflation outlook. When the waterway opens, we would expect these short-term inflation expectations to move lower, eventually giving the Fed cover to cut rates late in 2026 should the labor market weaken further from its current zero-growth equilibrium."

"We don’t think the likely Warsh transition will lead to significant policy changes in the very near term, as long as the conflict with Iran continues. We have been on record advocating for two cuts in Q4, conditional on the Strait of Hormuz reopening."