TD Securities strategists Oscar Munoz and Eli Nir argue that the Federal Reserve (Fed) faces conflicting signals as the Iran conflict drives an Oil shock. They say the US economy is mixed, with the dual mandate still in tension, and expect the Fed to stay in a holding pattern near term before delivering rate cuts later in 2026 if conditions allow.
Oil shock meets a mixed US backdrop
“The US economy’s current state is mixed, with the Fed’s dual mandate remaining in tension at the start of 2026. A Committee that leans somewhat hawkish in the near term won’t be entirely surprising to us, as keeping financial conditions a little tighter could be an effective policy posture at this stage.”
“However, we continue to think that Fed leadership leans dovish, with the core of the FOMC still penciling in rate cuts later in 2026 — in line with our expectations. In our view, the Fed will look through the energy shock as long as a number of conditions are met, including stable long-run inflation expectations and second-round effects on core inflation staying largely contained.”
“Especially when compared to the 2022 episode, the US economy is now in a starkly different place: monetary and fiscal policy are not overly lax, the labor market is no longer extremely tight, there’s no pent-up consumer demand fueled by excess savings, and global supply chains are not under as high a degree of stress. We think this allows the Fed to be more attentive to downside risks to the economy relative to its starting position in March 2022.”
“Needless to say, we could think of numerous scenarios that could derail the US economic outlook, resulting in either a clearly more hawkish Fed or a rapid easing of policy. The situation in the Middle East remains fluid. In the meantime, the Fed will sit tight as it waits for the chips to fall into place. A seemingly still resilient US economy grants the Fed space to be patient in the near term.”
(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)
Source: https://www.fxstreet.com/news/fed-oil-shock-complicates-rate-path-td-securities-202603251502
