Fed to Delay Rate Cuts Until Late 2026: Allspring

A forecast from Allspring Global Investments was issued on 15 May 2026, projecting the U.S. Federal Reserve will not begin cutting interest rates until late 2026. The firm's analysts attribute the delayed timeline to a persistent energy price shock, with oil prices expected to remain above $110 per barrel. This scenario would keep headline inflation too high for the central bank to comfortably pivot towards monetary easing before the fourth quarter of 2026.

What is Driving the Delayed Rate Cut Forecast?

Allspring's outlook is anchored in the inflationary impact of a sustained oil price shock. Elevated energy costs directly increase consumer expenses for gasoline and heating while also raising input costs for businesses across transportation, manufacturing, and agriculture. This pressure prevents inflation from returning to the Federal Reserve's target level, even if other sectors of the economy show signs of cooling.

The forecast assumes that core inflation, which excludes volatile food and energy prices, will also remain sticky. Persistent energy costs often bleed into core components over time as businesses pass on higher operational expenses. Allspring's model suggests that headline Consumer Price Index (CPI) inflation will struggle to fall below 3.5% until mid-2026, forcing the Fed to maintain its restrictive policy stance for longer than many market participants currently expect.

How Does This View Compare to Market Consensus?

The late-2026 projection is notably more hawkish than the prevailing market consensus. As of mid-May 2026, federal funds futures markets indicate traders are pricing in a significant probability of the first rate cut occurring in the first half of 2026. Current pricing implies a greater than 60% chance of at least one 25-basis-point cut by June 2026.

This divergence presents a key risk for investors positioned for imminent easing. If Allspring's oil shock scenario materializes, markets would need to reprice the entire forward curve for interest rates, potentially leading to volatility in both bond and equity markets. The counter-argument is that Allspring may be overestimating the persistence of the energy shock or underestimating the Fed's willingness to cut rates if economic growth deteriorates significantly.

What Are the Implications for Asset Allocation?

A "higher-for-longer" interest rate environment has distinct consequences for different asset classes. For fixed income, it suggests that bond yields may remain elevated, with the 10-year Treasury yield potentially staying above 4.75% for an extended period. This poses a risk for holders of long-duration bonds, whose prices fall as yields rise.

In equities, the landscape would favor value-oriented sectors and companies with strong balance sheets and consistent cash flow. High-growth technology stocks, whose valuations are more sensitive to discount rates, could underperform. A prolonged period of high rates could see the market's average price-to-earnings (P/E) ratio compress from its current level of 21.

The U.S. dollar would likely remain strong in this scenario. With other major central banks potentially easing policy sooner, the interest rate differential would favor the dollar. This could create headwinds for U.S. multinational corporations that generate a large portion of their revenue overseas.

What is the Primary Risk to This Outlook?

The main risk to Allspring's forecast is a sharper-than-expected economic downturn. The projection assumes a resilient economy that can withstand elevated interest rates through 2025. If U.S. GDP growth were to fall below 1.5% for two consecutive quarters, the Federal Reserve might be compelled to cut rates to support the economy, regardless of the inflation reading.

Another significant risk is a faster-than-anticipated resolution to the geopolitical factors driving the oil shock. A sudden de-escalation of global tensions or a surge in production from non-OPEC+ countries could cause oil prices to fall sharply. A decline in WTI crude back below $90 per barrel would rapidly alter the inflation outlook and likely pull forward the timeline for Fed rate cuts.

Q: What specific inflation level is the Federal Reserve targeting?

A: The Federal Reserve's official mandate is to achieve maximum employment and price stability, with an explicit long-term inflation target of 2%. Allspring's forecast for a late 2026 cut implies that policymakers will not see a sustainable path back to this 2% target until well into that year, primarily due to the stubborn influence of high energy prices on the broader economy.

Q: Does Allspring see a recession in its forecast?

A: The forecast does not appear to have a deep recession as its base case. Instead, it suggests a scenario of stagflation or a significant economic slowdown where growth is sluggish but not collapsing. The trigger for the eventual rate cut is the normalization of inflation, not a response to a severe economic crisis. However, holding rates at a restrictive level for nearly two more years inherently increases the risk of a hard landing.

Q: What is the difference between headline and core inflation?

A: Headline inflation measures the total inflation within an economy, including prices for commodities like food and energy, which can be very volatile. Core inflation excludes these items to provide a clearer picture of the underlying, more persistent price trends. Central banks, including the Federal Reserve, monitor both but often place greater emphasis on core inflation when setting long-term policy.

Bottom Line

Allspring projects the Federal Reserve will hold rates steady until late 2026, awaiting the end of a persistent oil-driven inflationary period.

Disclaimer: This article is for informational purposes only and does not constitute investment advice. CFD trading carries high risk of capital loss.