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UOB economist Alvin Liew revised his outlook for the Federal Reserve (Fed), predicting a prolonged policy pause in 2026 with only one 25-basis-point rate cut expected in the fourth quarter. This adjustment reflects ongoing inflationary pressures and delayed signs of labor market weakness, which have pushed back earlier expectations of two cuts. The Fed’s extended hold on rates contrasts with previous forecasts, signaling a more cautious approach to tightening monetary policy.
For markets, the prolonged pause could bolster the US dollar (USD) by maintaining higher interest rates relative to other major central banks. This may also support US Treasury yields and weigh on dollar-denominated commodities like gold and oil. Traders should monitor inflation data and labor market indicators for clues on the Fed’s timeline, as any deviation from the current path could trigger volatility in forex and bond markets.
The shift underscores the Fed’s prioritization of price stability over rapid rate normalization. Investors should watch for signs of inflation moderation or labor market deterioration, which could accelerate the timeline for rate cuts. Central bank communication and upcoming economic data releases will be critical in shaping market expectations over the next 12-18 months.
