Fed cutting rates in 2026 is 'essentially off the table': Ed Yardeni

Investing.com -- The Federal Reserve's easing bias is increasingly difficult to sustain and may need to give way to a tightening bias, Yardeni Research said, as a string of hotter-than-expected inflation data and a resilient labor market shift the calculus for policymakers.

The firm said a rate cut in 2026 is "essentially off the table," citing reaccelerating inflation, five consecutive years above the Fed's 2% target, the inflationary impact of the AI infrastructure buildout and a stabilizing jobs market.

Wall Street consensus has coalesced around the June 16-17 Federal Open Market Committee meeting as the likely moment for the easing bias to be dropped, with the two-year Treasury yield already trading above the effective federal funds rate, a market signal, Yardeni Research said, that the current policy rate may be too low to contain inflation.

April's producer price index report was a key catalyst for the shift, with final demand PPI rising 1.4% month-over-month and 6.0% year-over-year, the fastest annual pace since December 2022 and well above consensus.

Truck freight costs surged 8.1% month-over-month, the largest increase since 2009, while service costs posted their biggest monthly jump in four years.

Despite the hawkish pivot, Yardeni Research remains in the "none-and-done" camp for the rest of the year, pointing to moderating wage inflation, productivity-driven containment of labor costs and anchored long-term inflation expectations as offsetting disinflationary forces.

Even so, the firm warned that the probability of a rate hike is rising and said the 10-year Treasury yield is likely to push up to 4.60% in the coming days.

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