Rate cuts are now so 2025 …

Please note: All comments, information and data are as of end of day, Friday, June 19, 2026.

Deflating rate-cut hopes, inflating price fears

Heading into 2026, market industry consensus expectations were for modest rate cuts of 50-80 basis points (a basis point is 1/100th of a percent) by the U.S. Federal Reserve (the Fed), with even the Bank of Canada (BoC) potentially joining their southern colleagues.

How the world has changed in a mere few weeks. These expectations were established before the start of military strikes on Iran by U.S. and Israeli forces that began on Feb. 28. As a result of the hostilities in the Middle East, energy prices soared by as much as 70 percent from Feb. 28 to April , before moving lower as talks of a ceasefire unfolded. And while the increases have since abated, they still sit roughly 30 percent above  where they were prior to the start of the Iran war.

The Fed—and central banks globally—are now in the unenviable position of grappling with higher inflation against an uncertain economic growth outlook. In the U.S., the war’s impact on price levels was evident in May’s Consumer Price Index or CPI–the main consumer inflation gauge—results, which were up 0.5 percent for the month, and 4.2 percent year-over-year. This is the highest level since May 2023, and it was driven primarily by energy price increases, especially for gas, diesel and jet fuel. The rate of increase was modestly higher than consensus expectations, and concerns are rising that food prices are also beginning to push higher. Even core inflation (i.e. CPI, excluding food and energy costs) rose 2.9 percent on an annualized basis, representing another uptick from April and which sit well above the Fed’s two-percent inflation target.

Notwithstanding the recently announced Memorandum of Understanding (MoU) between the U.S. and Iran, we expect oil supply to remain tight in the near term and believe an automatic return to prewar energy prices is unlikely. Barrel inventory has dropped dramatically worldwide. In the U.S., the Strategic Petroleum Reserve has seen a decline to the lowest levels in over 40 years, as the drawdown in emergency stocks provided a partial buffer to the supply disruption triggered by the closure of the Strait of Hormuz. To the extent that it will take weeks to months for oil flows through the waterway to normalize, inventories could continue to decline in the very near term. Low inventories aside, time is also required for the rebuilding of damaged energy infrastructure. As such, the risk that inflation could remain sticky to the upside in the short- to medium-term remains.

Setting aside the outlook for energy prices, the second-order effects of energy-related inflation are already evident in higher airfares, rising transportation costs and broadening services prices. In fairness, even before the conflict, there were growing concerns with regard to inflation remaining higher than expected because of the Trump administration’s haphazard tariff policy, though these concerns were far less in focus this year than last.    

In addition to the aforementioned pick-up in inflation, the labour market—at least on the surface—has also continued to demonstrate resilience. May’s nonfarm payrolls rose by approximately 172,000 , and the unemployment rate held at a healthy level of 4.3 percent. The two key inputs to the Fed’s dual mandate—for now—seem to suggest little need for cuts in the near future.

The Federal Reserve: Kevin Warsh’s Eras Tour

In line with consensus expectations, the Fed chose to hold rates steady at a range of 3.5 percent-3.75 percent at its latest meeting in June—the first for newly minted Chairman Kevin Warsh. In contrast to consensus expectations heading into 2026, the Fed’s dot plot further out demonstrated a more hawkish posturing toward an interest-rate hike later this year. The vote among rate-setting Federal Open Market Committee (FOMC) members was effectively tied between those expecting a pause in rates for the balance of the year and those anticipating at least one hike. The median “dot” pointed to a hike of just about 25 basis points.

While the pause in and of itself was less of a surprise, there were several notable developments for the Committee.

First, Warsh’s inaugural meeting marked a remarkable shift in his hitherto dovish disposition—a shift widely speculated to have been a key motivator behind Trump’s decision to nominate him for the role. Recall that in the lead-up to his nomination, Warsh had many times opined on cutting rates. However, at his first meeting, Warsh’s surprisingly hawkish tone strongly emphasized inflation risks, as he pointed to the Committee’s “unambiguous and unanimous” resolve to get inflation under control. Reflecting on the Fed’s dual mandate, the Chairman all but ignored one half of it—“maximum employment.” By RBC Economics’ count , Warsh mentioned inflation 19 times during the press conference, compared to only four mentions of labour. When asked about the health of U.S. employment, Warsh’s comments were sparse: “the jobs data has been moving in a good direction.”

Press conference mentions of inflation and labour

Even before his first meeting, Warsh aimed to disrupt the status quo at the Fed. As part of his regime change, the Chairman did not submit a dot plot and did away with forward guidance—something for which he has previously expressed acute disdain, arguing that it hamstrings future policy. In what seemed to be a first step in introducing the market to a new era of brevity from the Fed, Warsh wasted no time in revamping the Committee’s communication policy—with a laconic post-meeting statement that ran a pointed 130 words, versus the typical 300 or more words in statements under previous Fed leadership.

An overhaul is clearly in the works as the Fed Chair plans to review the Federal Reserve’s communication practices by the end of the year—a process that would also consider post-FOMC meeting news conferences, the dot plot, meeting schedules, transcript and minutes. In addition, Warsh announced the formation of five task forces with the following mandates:

• Fed communications
• Balance sheet policy
• Data collection and sourcing
• Productivity and jobs
• Inflation frameworks and policies

Warsh’s view that the Fed telegraphing its every thought leaves the FOMC beholden to its forecast and detracts from the central bank’s agility is not necessarily without merit. Nevertheless, the shift away from “forward guidance” and explicit rate forecasts has immediate implications for the broader markets and economy. The introduction of a communication void by the Fed may have unintended consequences. The perceived lack of transparency by the Fed, and negative sentiment around policy uncertainty, could lead to more volatility in both equity and bond markets, as investors are left to draw their own conclusions with regard to the Fed’s path forward based on incoming economic data.

Still, as markets navigate a shakeup in Fed policy and process in the near term, we believe the Fed will ultimately remain data-dependent on a go-forward basis. In light of the tight labour market, coupled with inflation firmly above the Fed’s two-percent target (which Warsh has kept intact), we believe that the new Chairman will be hard-pressed to remain aligned with Trump’s stance on rate cuts, and expect the Fed to remain on the sidelines for the remainder of this year. The Iran War MoU is a positive at face value; oil supply and demand remain tight and other inflationary pressures related to tariffs, wage growth and AI have yet to dissipate. All told, the Fed’s bias suggests a rate hike rather than a cut if such pressures endure.

Canada: Recession or no recession, that is the question

Our view on Canada is that the preponderance of lacklustre economic data year-to-date, balanced with higher inflation underpinned by elevated energy prices, will likely keep the Bank of Canada on hold—making no monetary policy changes for the balance of the year.

Though Canada’s annual inflation rate rose to just under three percent in April—up from 2.4 percent in March —this was primarily driven by higher gasoline and other energy prices. On a positive note, unemployment fell to 6.6 percent in May (down sharply from April’s 6.9 percent) as the economy added 88,000 mostly full-time jobs (and delivered the first significant job growth since Nov. 2025), although GDP growth contracted modestly in the first quarter. While this was the second consecutive quarter of GDP decline, we do not yet consider the country to be in recession, as the economy’s weakness is not sufficiently broad-based. Importantly, these results together suggest meaningful slack in the economy that could, over time, act as a counterweight to inflationary pressures.

At its June meeting, the Bank of Canada’s rate-setting Governing Council maintained the policy interest rate at 2.25 percent , continuing to monitor inflation and ongoing global economic shifts. For now, the BoC expects geopolitically driven price pressures to subside toward the tail-end of the year, bringing headline inflation back down to its two-percent target.

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