CICC says no Fed rate cuts in 2026 amid 3.8% inflation

An outlook for higher-for-longer interest rates is solidifying after a series of US inflation indicators exceeded forecasts, leading analysts at CICC to project the Federal Reserve will refrain from cutting rates this year. The bank’s view is predicated on inflation remaining significantly above the Fed’s 2 percent target, a resilient labor market, and the need for incoming Fed Chair Kevin Warsh to establish anti-inflationary credibility.

"As a new Fed chair, Warsh's primary task after taking office will be to quickly establish policy credibility," CICC said in a report. "Turning a blind eye to the upward risks to inflation would seriously weaken his policy credibility and pose risks to his subsequent administration."

The analysis follows April data that showed broad-based price pressures. The Consumer Price Index rose 3.8 percent from a year earlier, its highest level since 2023, while the Producer Price Index surged 6 percent, the fastest pace since 2022. The bond market has reacted accordingly, with benchmark 10-year Treasury yields climbing to their highest since February 2025 as traders pare back bets on monetary easing.

For markets, the prospect of a more hawkish Fed implies a tightening of US dollar liquidity that will continue to pressure assets that have relied on a low-rate environment. CICC forecasts Personal Consumption Expenditures inflation, the Fed's preferred gauge, will remain above 3.5 percent for the year, a level that makes rate cuts difficult to justify.

Inflation Pressure Spreads Beyond Energy

While rising energy prices linked to geopolitical tensions in the Middle East are a primary driver, the CICC report noted that inflationary pressures are diffusing more broadly across the economy. Food prices have accelerated, and rising fuel costs are being passed on to consumers through higher airfares.

Further, a rapid expansion of AI-related demand is causing supply shortages for memory and chips, pushing up prices for personal computers and related hardware. This dynamic adds a new layer of stickiness to inflation that is independent of energy shocks. CICC projects that if peace talks between the US and Iran show no progress and the Strait of Hormuz remains constrained, upward pressure on oil will persist, with overall PCE inflation potentially climbing to 3.9 percent in the second quarter.

Warsh's Fed Credibility at Stake

The appointment of Kevin Warsh, who is perceived as more hawkish, is seen as another headwind for rate cuts. While Warsh has previously advocated for a combination of rate cuts and balance sheet reduction, CICC argues such a policy is unlikely in the current environment. The Federal Open Market Committee is not a monolith, and several officials have already voiced opposition to easing policy without substantial improvement in the inflation outlook.

Faced with the political and economic constraints of raising rates, Warsh’s most likely path is to send clear anti-inflation signals without tightening policy outright. CICC suggests the Fed may abandon its forward guidance for cuts and could even signal a more aggressive pace of quantitative tightening—reducing its balance sheet—as an alternative to hiking. This would reinforce the central bank’s commitment to fighting inflation while navigating a complex political landscape.

This article is for informational purposes only and does not constitute investment advice.