NEW DELHI — The U.S. Federal Reserve is likely to keep interest rates unchanged in calendar 2026 as inflation risks remain elevated because of spillover effects from the U.S.-Iran conflict, according to a report by Elara Capital.
The firm said it has withdrawn its earlier forecast for three Fed rate cuts totaling 75 basis points in 2026.
Elara assigned a 20% probability to a 25-basis-point rate increase in December 2026 if the Strait of Hormuz remains closed until September, energy prices rise further and core personal consumption expenditures inflation moves higher.
“We believe peak uncertainty regarding the US labour market has passed and hereon, the labor market is set to soften at a gradual pace,” the report said.
The firm said growth risks remain moderate and are likely to appear with a lag of at least a year, making them unlikely to be a major focus for the Federal Open Market Committee in 2026.
“With the US-Iran conflict leading to the surge in energy prices, the potential transmission channel to growth is likely to emerge from softening consumer demand supplemented by moderation in business spending, due to supply chain bottlenecks,” the report said.
Elara said tariffs, along with higher energy and food prices, are expected to keep inflation elevated and persistent.
“A runaway inflation is not our base case scenario this time, because the support to private demand via fiscal transfer payments akin to CY22 is missing,” the report said.
World leaders have warned of energy shortages and broader economic disruption stemming from the Iran war. Asia is particularly exposed because of its heavy reliance on energy and other critical supplies from the Gulf. (Source: IANS)
