BNY’s John Velis highlights that market-implied US policy rates are projected to remain virtually flat through the end of 2026 and into early 2027, a stance that reflects prevailing uncertainties regarding economic growth, inflation, and the ongoing war [1]. This flat curve suggests that investors and policymakers are cautious, given the unpredictable duration and impact of the conflict, and are therefore not committing to a clear direction for rates in the near term [1].
According to Velis, many Federal Open Market Committee (FOMC) participants anticipate eventual rate cuts if inflation declines in line with their expectations [1]. He aligns with this view, noting that a cooling of the conflict and a related easing of inflationary pressures could prompt the FOMC to lower rates [1]. Specifically, if the conflict ends and crude oil supply partially resumes, the resulting economic damage—especially to an already weak labor market—could justify rate cuts, provided oil prices have peaked and are on the decline, even if they do not return to prewar levels [1].
However, the FOMC minutes also reveal that some policymakers see a strong case for maintaining a two-sided approach to future interest rate decisions [1]. This means that while rate cuts are possible if inflation falls, upward adjustments to the federal funds rate could still be appropriate if inflation remains above target [1]. This dual perspective underscores the data-dependent nature of future policy moves and the lack of consensus within the FOMC regarding the timing and direction of rate changes [1].
Overall, the market’s agnostic stance on rates and the FOMC’s emphasis on flexibility reflect the high degree of uncertainty in the current macroeconomic environment, with both rate hikes and cuts remaining on the table depending on how inflation and the conflict evolve [1].
CONCLUSION
The market is pricing in a flat US policy rate curve through 2026, mirroring uncertainty around inflation and geopolitical risks. While many FOMC members and BNY’s John Velis expect rate cuts if inflation cools, some policymakers remain open to further hikes if inflation stays elevated. The outlook for US rates remains highly data-dependent and contingent on developments in inflation and the ongoing conflict.