{"id":33446,"date":"2026-06-30T15:17:35","date_gmt":"2026-06-30T19:17:35","guid":{"rendered":"https:\/\/www.rbcwealthmanagement.com\/en-ca\/?p=33446"},"modified":"2026-06-30T15:17:37","modified_gmt":"2026-06-30T19:17:37","slug":"rate-cuts-are-now-so-2025","status":"publish","type":"post","link":"https:\/\/www.rbcwealthmanagement.com\/en-ca\/insights\/rate-cuts-are-now-so-2025","title":{"rendered":"Rate cuts are now so 2025 \u2026"},"content":{"rendered":"\n

Please note: All comments, information and data are as of end of day, Friday, June 19, 2026.<\/strong><\/p>\n\n\n\n

Deflating rate-cut hopes, inflating price fears<\/h2>\n\n\n\n

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.<\/p>\n\n\n\n

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 <\/a>, before moving lower as talks of a ceasefire unfolded. And while the increases have since abated, they still sit roughly 30 percent above <\/a> where they were prior to the start of the Iran war.<\/p>\n\n\n\n

The Fed\u2014and central banks globally\u2014are now in the unenviable position of grappling with higher inflation against an uncertain economic growth outlook. In the U.S., the war\u2019s impact on price levels was evident in May\u2019s Consumer Price Index <\/a> or CPI\u2013the main consumer inflation gauge\u2014results, 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\u2019s two-percent inflation target. <\/p>\n\n\n\n

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 <\/a> 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.<\/p>\n\n\n\n

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\u2019s haphazard tariff policy, though these concerns were far less in focus this year than last.    <\/p>\n\n\n\n

In addition to the aforementioned pick-up in inflation, the labour market\u2014at least on the surface\u2014has also continued to demonstrate resilience. May\u2019s nonfarm payrolls rose by approximately 172,000 <\/a>, and the unemployment rate held at a healthy level of 4.3 percent. The two key inputs to the Fed\u2019s dual mandate\u2014for now\u2014seem to suggest little need for cuts in the near future.<\/p>\n\n\n\n

The Federal Reserve: Kevin Warsh\u2019s Eras Tour<\/a><\/strong><\/h2>\n\n\n\n

In line with consensus expectations, the Fed chose to hold rates steady at a range of 3.5 percent-3.75 percent <\/a> at its latest meeting in June\u2014the first for newly minted Chairman Kevin Warsh. In contrast to consensus expectations heading into 2026, the Fed\u2019s 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 \u201cdot\u201d pointed to a hike of just about 25 basis points.<\/p>\n\n\n\n

While the pause in and of itself was less of a surprise, there were several notable developments for the Committee.<\/p>\n\n\n\n

First, Warsh\u2019s inaugural meeting marked a remarkable shift in his hitherto dovish disposition\u2014a shift widely speculated to have been a key motivator behind Trump\u2019s 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\u2019s surprisingly hawkish tone strongly emphasized inflation risks, as he pointed to the Committee\u2019s \u201cunambiguous and unanimous\u201d resolve to get inflation under control. Reflecting on the Fed\u2019s dual mandate, the Chairman all but ignored one half of it\u2014\u201cmaximum employment.\u201d By RBC Economics\u2019 count <\/a>, 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\u2019s comments were sparse: \u201cthe jobs data has been moving in a good direction.\u201d<\/p>\n\n\n\n

Press conference mentions of inflation and labour<\/h3>\n\n\n\n
\"Bar<\/figure>\n\n\n\n

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\u2014something 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\u2019s communication policy\u2014with a laconic post-meeting statement that ran a pointed 130 words, versus the typical 300 or more words in statements under previous Fed leadership.<\/p>\n\n\n\n

An overhaul is clearly in the works as the Fed Chair plans to review the Federal Reserve\u2019s communication practices by the end of the year\u2014a 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:<\/p>\n\n\n\n