Nomura raises its view on the Fed path: rate-cut expectations shift to an indefinite pause

Overview

This report is Nomura's US economic weekly, and its core theme is the repricing of the Fed policy path. The report argues that recent US macro data have been relatively hawkish: growth remains solid, investment and consumption are still supported, the labor market is stabilizing and may even be reaccelerating, and both survey and hard data show that price pressures are building. Against this backdrop, Nomura changes its Fed forecast from one cut each in September and December to an indefinite hold on the policy rate.

Core views

The report's core judgment has three parts. First, political pressure is no longer a strong near-term force pushing for rate cuts; Trump said in an interview that it is difficult to assess the data before the war ends, and indicated that Kevin Warsh would be allowed to decide the policy direction on his own. Second, even if Warsh leans dovish, recent inflation readings and hawkish Fed speak make it difficult for him to convince a majority of FOMC members to support cuts; the April FOMC minutes also showed that more officials were willing to remove easing bias. Third, the data do not support a rapid shift toward easing: manufacturing and capex are accelerating, housing demand remains resilient despite high mortgage rates, weekly ADP data point to improving private payroll growth, initial claims are largely flat, and rising price indicators and inflation expectations make policy harder to loosen.

Analysis framework

The report combines macro data tracking, policy communication interpretation, and event-risk assessment. On growth, it focuses on manufacturing PMI, durable goods orders, capital goods shipments, housing sales, GDP tracking, and consumer spending; on employment, it tracks weekly ADP employment and initial and continuing jobless claims; on inflation, it synthesizes CPI, PPI, import prices, core PCE, supercore PCE, manufacturing input prices, and inflation expectations; on policy, it analyzes FOMC minutes, Fed officials' speeches, and changes in political pressure.

Methodology notes

• Monetary policy analysisFed policy path revision

  Reassess the Fed's rate-cut path based on inflation, growth, employment, and policy communication.

  Nomura changes its prior base case of cuts in September and December to an indefinite pause, mainly because inflation pressures remain elevated, growth momentum is still strong, Fed speak has turned hawkish, and political pressure for cuts has eased.

• Macro data trackingGDP tracking and final sales

  Update US growth momentum using high-frequency and monthly data.

  The report's Q2 GDP tracking is 2.6% q-o-q ar, and real final sales to private domestic purchasers are 2.9% q-o-q ar, indicating that domestic demand remains resilient.

• Inflation decompositioncore PCE and supercore PCE

  Separate price pressures in core goods, core services, and supercore services.

  The report expects April core PCE at 0.300% m-o-m and 3.3% y-o-y. Core goods have risen for five consecutive months, and supercore PCE has softened in the short term but may move higher again as financial services and airfare rebound.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• US Treasury rates

  A longer period of high rates and delayed cuts should provide upward or sticky support to Treasury yields.

  Strengths

  Stronger growth and inflation data, hawkish Fed speak, and fading easing bias in FOMC.

  Weaknesses

  If geopolitical conflict sharply worsens risk sentiment or growth slows materially, safe-haven buying could push yields lower.

  Comparison

  Compared with the prior forecast of two rate cuts, the new indefinite-pause path is more hawkish for front-end rates.

  Risks

  A renewed inflation acceleration could force the market to reprice hike risk; unexpectedly weaker growth could restore cut expectations.

• US equities

  A prolonged high-rate environment may weigh on valuations, but strong growth and AI investment still support earnings expectations.

  Strengths

  Corporate investment is broadening, consumer spending remains resilient, and financial conditions were previously accommodative.

  Weaknesses

  High rates and sticky inflation may limit valuation expansion, and if the AI boom breaks, asset prices could reprice lower.

  Comparison

  Cyclical momentum is stronger than in a typical pre-recession environment, but policy easing room is weaker than the market had previously expected.

  Risks

  An AI bubble burst, tighter financial conditions, geopolitical escalation, and supply-chain shocks.

• USD

  A relatively more hawkish Fed path typically supports the dollar through yield differentials.

  Strengths

  US growth resilience and a later shift in rate-cut expectations are favorable for the dollar.

  Weaknesses

  If political pressure damages Fed credibility or the fiscal outlook worsens, the dollar could come under pressure.

  Comparison

  Compared with a dollar environment shaped by easing expectations, this report's scenario is more supportive for the dollar.

  Risks

  Global risk events, fiscal concerns, and shocks to policy credibility could trigger volatility.

• Commodities and inflation-linked assets

  The Iran war, energy prices, metal prices, and semiconductor shortages are viewed as new sources of price pressure.

  Strengths

  Supply disruptions and AI-related demand may support some commodity prices and inflation-hedge demand.

  Weaknesses

  Energy consumption accounts for only a small share of household spending in the US, and domestic energy production gives the economy a relative buffer against oil price shocks.

  Comparison

  The report argues that tariff-driven inflation pressure will ease, but new supply shortages may take over as the next source of commodity inflation.

  Risks

  An extended conflict, supply-chain disruptions, memory chip shortages, and rising metal prices could trigger a second round of commodity price increases.

Key data

• Fed policy forecastIndefinite holdThe prior forecast was one rate cut each in September and December.
• Q2 GDP tracking2.6% q-o-q arDown 0.1 percentage point from last week.
• Real final sales to private domestic purchasers2.9% q-o-q arThe report says this was unchanged from last week.
• April core PCE forecast0.300% m-o-m, 3.3% y-o-yMarch was 0.293% m-o-m and 3.2% y-o-y.
• May S&P manufacturing PMI input prices index79.5Up from 68.4, the largest monthly increase in the series' history.
• University of Michigan long-term inflation expectations3.9%The May final reading was sharply revised up from the initial 3.4%.
• ADP weekly private employment4-week average 42.5k/weekAbove the prior 33.0k, the highest in the survey's history.
• April durable goods orders forecast4.8% m-o-mExcluding transportation equipment, the forecast is 0.9% m-o-m, and core capital goods shipments are expected to rise 1.0% m-o-m.
• April personal income and spending forecastIncome 0.4% m-o-m, spending 0.6% m-o-mActual personal spending is expected to rise 0.2% m-o-m.
• 2026 Q4 core PCE forecast3.3% y-o-yThe report believes core inflation remains well above the Fed's 2% target, with risks skewed to the upside.

Impact & implications

The investment implication of this report is that the US yield curve needs to price in a longer period of elevated rates, and near-term rate-cut trades lack macro and policy communication support. If core PCE continues to run at roughly 0.3% per month, and AI-related supply shortages, metal prices, airfare, and sticky wages continue to push inflation higher, the Fed may lean more toward a prolonged pause rather than preventive rate cuts. For assets, this is typically negative for duration assets and valuation expansion in high-multiple risk assets, while supporting the dollar and keeping front-end rates elevated; however, geopolitical risk, tighter financial conditions, or a reversal in the AI boom could alter this path.

Risks

• Further escalation of geopolitical risk could tighten financial conditions and worsen the fiscal outlook.
• Rising political pressure on individual FOMC members could weaken Fed credibility and trigger sharp market reactions.
• If the AI boom breaks, asset valuations could undergo a meaningful correction.
• Persistent memory chip shortages and supply-chain disruptions caused by the Iran war could trigger a second round of commodity price increases.
• If the Fed responds too slowly to inflation, it may ultimately fall behind the curve and be forced to hike rates rapidly to restore credibility.

What to watch

• Whether April core PCE comes close to Nomura's forecast of 0.300% m-o-m and 3.3% y-o-y.
• Whether FOMC officials continue to support removing the easing bias and whether more members shift toward discussing hike risk.
• Whether ADP, initial jobless claims, and nonfarm payrolls confirm a reacceleration in the labor market.
• Whether manufacturing PMI input prices, the NY Fed services price index, and consumers' long-term inflation expectations continue to rise.
• Whether AI-related memory chips, power, and metal supply constraints continue to push commodity prices higher.
• Whether the Iran war and energy price changes begin to materially affect consumption, supply chains, and financial conditions.
• Whether Trump and other political forces again increase public pressure on Warsh and the FOMC's policy direction.