Federal Reserve: Holding rates while watching inflation risks – Commerzbank

Commerzbank’s Bernd Weidensteiner expects the Federal Reserve to leave the policy rate at 3.50%–3.75% at the upcoming meeting, while debating potential hikes if inflation fails to ease. Weidensteiner’s baseline assumes core Personal Consumption Expenditures (PCE) Price Index slows toward a 2% path, allowing the Fed to avoid further tightening and possibly start cutting rates from mid‑2027, though higher Oil prices pose upside inflation risks.

Policy on hold, cuts seen in 2027

"The recent escalation in the Persian Gulf has led to another noticeable rise in oil prices. Even if core inflation remains stable, this could delay the decline in headline inflation during the summer months, increasing the risk of second-round effects."

"Even under these favorable assumptions—the monthly increase so far in 2026 has averaged 0.35%—the 2% mark would not be reached until spring 2027."

"The Fed is likely to keep its key interest rates unchanged again at its meeting next week. While the debate over a rate hike has gained momentum, the Fed might get lucky and avoid having to raise rates in the second half of the year if the inflation rate falls again."

"The Fed will first want to gain more clarity on inflation trends before seriously considering an interest rate hike. It will therefore likely leave the target range for its policy rate at 3.50%–3.75% at next week’s meeting."

"In this case, the Fed would likely refrain from raising interest rates and could even lower its policy rate starting in mid-2027."