Nomura drops Fed rate-cut bets as inflation pressures mount

Nomura’s latest call points to a harder truth for households and businesses: borrowing costs may stay high, and could even rise, if inflation keeps refusing to cool. The firm dropped its expectation for two 25-basis-point Fed cuts in September and December in a May 21 note, joining a widening Wall Street shift away from cheaper money in 2026.

The change reflects a more hawkish view built on persistent inflation, elevated oil prices tied to Middle East conflict and a widening global memory-chip shortage that economists say is starting to feed into consumer prices. Morgan Stanley and Barclays have already ruled out rate cuts this year, and the market has started to price in a very different path, one that leaves the Fed holding tight for longer or, if inflation worsens, forced to consider hikes.

That shift matters far beyond trading desks. A mortgage buyer who expected relief later this year may be facing the same stubborn monthly payment for longer. Credit card borrowers, whose rates tend to track the Fed’s benchmark only with a lag, would remain stuck with expensive balances. Companies thinking about new factories, equipment or hiring could find financing costs still too high to justify expansion, especially if banks keep lending standards tight.

The concern is not just inflation in the abstract. Fed officials have been watching the war in Iran for its potential to add to price pressure through oil and broader supply-chain disruptions. Higher energy costs can ripple quickly into transport, food and manufacturing, while chip shortages can filter into electronics, autos and other consumer goods. That combination leaves the central bank with less room to relax policy even if growth stays solid.

Kevin Warsh was due to be sworn in as Fed chair on Friday, and he signaled at his confirmation hearing that he remained inclined toward rate cuts based on his own outlook. Nomura’s reading was more cautious. Despite strong growth and relatively easy financial conditions, the bank said recent data and Fed commentary made it skeptical that Warsh could build a majority for cuts inside the Federal Open Market Committee.

Markets have already taken the hint. CME FedWatch pricing implied about a 58% chance that the Fed could raise rates by at least 25 basis points by year-end, a dramatic swing from a cut cycle to a tightening debate. For the Fed, the risk is credibility as much as policy: if geopolitical shocks keep inflation hotter for longer than investors expected, the central bank may have to prove it can still bring prices down without easing prematurely.