The US Federal Reserve is expected to shift from an easing to a tightening stance at the upcoming Federal Open Market Committee (FOMC) meeting, with Elara Securities forecasting a 20% likelihood of a 25 basis points hike in December should the Strait of Hormuz remain closed and energy prices rise significantly. According to the report, inflation concerns have now surpassed issues in the labor market, which may lead the Fed to maintain its current rate for the remainder of 2026.
Elara Securities revised its previous projections, retracting an earlier forecast that predicted three rate cuts of 75 basis points in 2026, citing rising inflation pressures stemming from the ongoing US-Iran conflict despite a stable yet softening labor market. The firm now believes the Fed’s 2% inflation target is increasingly unrealistic.
“Given that upward inflation risks are likely to dominate over the downside risks to the labor market for a substantial part of the year, we are revising our expectations for 2026,” the report stated. Elara anticipates that if inflation remains 80-100 basis points above the target for an extended period, the FOMC will eliminate its easing bias in policy minutes, potentially adopting a tightening stance if inflation persists above target levels.
Elara also updated its forecast for the core PCE (Personal Consumption Expenditures) inflation rate to 2.9% year-over-year for the fourth quarter, an increase from the previous estimate of 2.6%. The broader PCE is projected to be in the range of 3.0-3.5%. This adjustment is attributed to tariff-related impacts and increased energy and food prices, though a scenario of runaway inflation is not expected, primarily due to the absence of fiscal stimulus akin to that of 2022.
“Rising tariffs coupled with surging energy and food costs will likely sustain elevated inflation,” Elara noted. In terms of the labor market, Elara suggests that peak uncertainty has passed, with hiring momentum showing signs of improvement. Their Composite Index of Lead Indicators from regional Federal Reserve surveys indicates the highest hiring optimism since February 2025, while ADP private payroll figures have shown a positive trend.
Despite these improvements, Elara has retained its unemployment rate forecast at 4.6% for 2026, considering tighter financial conditions and reduced labor demand due to automation. They perceive growth risks as moderate and likely to emerge with a delay. The estimate for GDP growth remains at 2.2% year-over-year for 2026, noting that consumer demand and business spending may weaken due to supply chain constraints. However, US energy exports resulting from the Middle Eastern conflict could offer a slight upside, potentially enhancing growth by 10-15 basis points.
The analytics firm allocated a 20% probability to a 25 basis points rate hike in December 2026 if the Strait of Hormuz remained closed until September, which could push core PCE above the Fed’s target for five consecutive years. The current voting rotation for the FOMC, including members Hammack, Logan, Kashkari, and Paulson, is viewed as generally more cautious or hawkish. Elara commented that under Kevin Warsh’s influence, a consensus for rate cuts might be challenging given inflation rates exceeding 3% and unemployment rates between 4.3% and 4.6%. Such pressure could increase 10-year U.S. Treasury yields toward 5%.
The report was published on May 17, 2026.
