Nomura: Expects Fed to Keep Rates Unchanged Until End of 2027

Overview

This issue of Nomura's US Economics Weekly focuses on interpreting the Federal Reserve's June 2026 FOMC meeting decision and economic outlook. Although the meeting minutes and dot plot showed a more hawkish tilt than expected, implying rising risks of rate hikes, Fed Chair Warsh's remarks at the press conference were dovish, and he announced the formation of several task forces to review the Fed's policy framework. Based on this, Nomura maintains its base-case forecast that the Fed will keep the policy rate unchanged until the end of 2027. Additionally, the report updates inflation data forecasts, noting that May core PCE inflation may accelerate, and analyzes the potential impact of the US-Iran ceasefire agreement on the economy and markets.

Core views

Monetary Policy and Forward Guidance: The Fed decided to keep interest rates unchanged at its June meeting. While the dot plot and Summary of Economic Projections (SEP) were generally hawkish, with the median indicating a possible half-rate hike in 2026 (to 3.75%) and most officials believing that 2026 is not suitable for rate cuts, Chair Warsh's press conference sent dovish signals. He downplayed the importance of the dot plot, calling it a "pencil with an eraser," implying that significant revisions could be made if the macro environment changes. Warsh also hinted that an inflation level of 2.0%-2.9% might be consistent with the 2% target and argued that monetary policy restrictiveness is unevenly distributed, with interest rate tools suppressing the housing market while balance sheet policies support financial markets. Establishment of Task Forces: Warsh announced the creation of five task forces focusing on Fed communication, balance sheet policy, data measurement, productivity and employment, and the inflation framework. These groups are expected to submit recommendations by the end of the year. Nomura believes this move may delay rate hike decisions, as the task forces might propose more dovish recommendations, such as using real-time data instead of traditional survey data, which could change how inflation is measured and thereby raise the threshold for rate hikes. Inflation and Economic Data: Nomura expects May core PCE inflation to accelerate to 0.376% month-over-month and rise to 3.457% year-over-year. This acceleration is primarily driven by strong increases in PPI financial services prices and a jump in imported air passenger transportation prices, although core goods inflation may turn negative. Super-core PCE inflation (services inflation excluding housing and other services) is expected to accelerate significantly to 0.5%. On the economic activity front, benefiting from strong retail sales, Nomura raised its Q2 GDP tracking forecast from 2.4% to 2.6%. Durable goods orders excluding transportation equipment are expected to grow 0.6% month-over-month, reflecting the positive impact of the AI investment boom. Geopolitical Impact: US President Trump signed a memorandum of understanding to end the war with Iran, including opening the Strait of Hormuz and extending the ceasefire for 60 days. Crude oil prices reacted with a sharp decline, and lower retail gasoline prices are expected to exert downward pressure on overall inflation in June. Nomura believes that because energy commodities account for a small share of household spending and domestic US energy production is sufficient, the US economy is relatively immune to oil price shocks triggered by the Iran war.

Analysis framework

Nomura's analytical logic centers on the interplay between "policy signals vs. data reality." First, by dissecting hard data from the FOMC meeting (dot plot, SEP) and soft information (Chair's remarks, statement wording), it identifies divisions among policymakers and uncertainty regarding future policy paths. Second, it uses high-frequency data and input-output relationships (such as the transmission from PPI and import prices to PCE) to anticipate upcoming inflation data, thereby validating the rationality of Fed policy. Finally, it incorporates the impact of geopolitical events (US-Iran ceasefire) on commodity prices and supply chains to revise short-term forecasts for economic growth and inflation. This top-down approach combined with micro-data verification aims to capture subtle signs before policy shifts.

Methodology notes

• Macroeconomic framework

  Signal Game Analysis of Fed Dot Plot vs. Chair's Remarks

  The report looks not only at numerical changes in the dot plot but places greater emphasis on the Chair's interpretation of the dot plot (e.g., "pencil with an eraser") to judge the flexibility and true intent of policy-making, avoiding being misled by static data.

• Industry/Sector Analysis FrameworkVolume-price decomposition

  Component Decomposition and Transmission Mechanism of PCE Inflation

  By decomposing core PCE into goods and services, and further tracking upstream indicators such as PPI financial services and import prices, it precisely identifies the drivers of inflation acceleration (e.g., airfares, financial services) rather than just looking at the aggregate figure.

• Macroeconomic framework

  Potential Restructuring of Policy Framework by Task Forces

  Focuses on the potential long-term changes to the Fed's policy framework (e.g., inflation measurement standards, data sources) brought about by the establishment of task forces, which could lead to a structural shift in the policy reaction function, rather than just cyclical adjustments.

Key data

• May Core PCE Inflation MoM Forecast0.376%Accelerating from the revised April figure of 0.230%
• May Core PCE Inflation YoY Forecast3.457%Rising from the revised April figure of 3.307%
• 2026-2027 Policy Rate Forecast3.625%Unchanged, year-end level
• 2026 Median Dot Plot Rate3.750%Implies a half-rate hike, higher than current levels
• Q2 GDP Tracking Forecast2.6%Raised from last week's 2.4%, seasonally adjusted annualized qoq
• May Super-Core PCE Inflation MoM0.5%Highest level since January

Impact & implications

The report argues that despite the hawkish dot plot, Warsh's dovish leanings and the establishment of task forces provide some buffer for the market, reducing the probability of aggressive near-term rate hikes. However, inflation stickiness (particularly in services) persists, and the Fed may face the risk of "falling behind the curve." If inflation remains elevated, tighter policy may be required more urgently in the future. The US-Iran ceasefire agreement is beneficial in the short term for lowering energy costs and inflation expectations, boosting consumer confidence, but long-term negotiations remain uncertain. For investors, it is necessary to be wary of long-term uncertainties arising from the restructuring of the Fed's policy framework, as well as the risk of asset valuation corrections potentially caused by the AI investment boom.

Risks

• Further escalation of geopolitical risks, leading to tighter financial conditions and deteriorating fiscal prospects
• Increased political pressure on FOMC members, which could damage the Fed's credibility and trigger sharp market reactions
• A collapse of the AI boom could lead to significant asset valuation corrections
• Persistent memory chip shortages or a prolonged Iran war causing supply chain disruptions, triggering a second round of commodity price increases

What to watch

• Appointment of task force members and policy recommendations proposed before year-end
• Persistence of core PCE inflation, especially super-core services inflation
• Progress in negotiations for a final US-Iran agreement and sanctions relief
• Extent of the Fed's adoption of alternative inflation data (e.g., real-time data)