The US Federal Reserve is likely to drop its easing bias at the next FOMC meeting and shift toward a tightening stance through 2026, with a 20% chance of a 25 bps hike in December if the Strait of Hormuz remained closed and energy prices spiked further, Elara Securities said in a research report.
The brokerage noted that inflation risks now decisively outweighed labour market concerns, keeping the Fed on hold for the rest of CY26.Elara Securities withdrew its earlier forecast of three 75 bps rate cuts in CY26, citing incremental inflationary pressure from the US-Iran conflict against a backdrop of a softening but steady labour market. The brokerage said the trajectory of inflation had turned upward and that the Fed's 2% target was no longer achievable in its view.
"With upside inflation risks set to outweigh downside risks to the labour market for a major part of the year, we withdraw our call of three rate cuts of 75bp in CY26E and now expect the Federal Reserve to hold rates," Elara noted. The report added that negative spillovers from the conflict could be long-lasting, keeping inflation elevated through CY26. Elara expected the FOMC to remove its easing bias from policy minutes going forward and to transition to a tightening bias if inflation remained 80-100 bps above target for a sustained period. Under that scenario, the Fed would show "higher tolerance for softer labour market (unless the unemployment rate is >4.8%)".
Elara revised its US core PCE forecast higher to 2.9% Q4/Q4, from 2.6% earlier, with headline PCE seen at 3.0-3.5%. It attributed the upward revision to tariff-related pass-through and higher energy and food prices, while noting that a runaway inflation scenario was not its base case due to the absence of fiscal transfers on the scale of 2022.
"Tariffs, along with a surge in energy and food prices, would keep inflation elevated and sticky," the brokerage said.On the labour market, Elara believed peak uncertainty had passed and that hiring momentum had improved. Its Composite Index of Lead Indicators from Regional Fed Surveys pointed to the highest hiring optimism since February 2025, while ADP private payrolls had turned positive at 21,000 on a 3mma basis, excluding education and health.
Despite this, Elara retained its unemployment rate projection at 4.6% for CY26, factoring in tighter financial conditions and slower labour demand due to automation.Growth risks were seen as moderate and likely to materialise with a lag. Elara kept its CY26 GDP forecast at 2.2% Q4/Q4, noting that while consumer demand and business spending could soften due to supply chain bottlenecks, US energy exports from the Middle East conflict could provide a 10-15 bps upside.
The brokerage also assigned a 20% probability to a 25 bps hike in December 2026 if the Strait of Hormuz remained closed until September, pushing core PCE above target for five years. It added that the 2026 FOMC voting rotation, with Hammack, Logan, Kashkari and Paulson as regional voters, left the committee "more hawkish or cautious". On Kevin Warsh's potential influence, Elara said a consensus for more cuts would be difficult with inflation above 3% and unemployment at 4.3-4.6%, and that any such attempt could push 10-year UST yields toward 5%.
Published on May 17, 2026