Nomura Forecasts Zero 2026 Fed Cuts as Inflation Persists
0h ago|4 min readStandard
Fazen Markets Editorial Desk
Collective editorial team · methodology
federal reserveinterest rates
Fazen Markets Editorial Desk
Collective editorial team · methodology
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Nomura announced on 22 May 2026 its revised projection for U.S. monetary policy, forecasting no Federal Reserve interest rate cuts for the remainder of the year. The investment bank cited persistent inflationary pressures across core services and shelter as the primary driver for its new, more hawkish outlook. This shift places Nomura at the most restrictive end of Wall Street forecasts, which had priced in at least one 25-basis-point cut for late 2026. The firm expects the Fed's target range to hold steady at 4.75%-5.00% through December, a full 100 basis points above the level at the end of 2023.
Nomura's forecast represents a significant departure from the market consensus that dominated the first quarter of 2026. As recently as March, the median forecast from major banks projected one to two cuts beginning in the third quarter, contingent on inflation cooling towards the Fed's 2% target. The last comparable instance of a major bank withdrawing all projected cuts in a single forecast update occurred in July 2024, when Barclays scrapped its calls after a hot CPI print.
The current macro backdrop is defined by a resilient U.S. labor market, with unemployment at 3.8% and wage growth consistently above 4% year-over-year. The catalyst for Nomura's revision was the successive inflation readings for March and April 2026, which showed core CPI accelerating to a 3.2% annual pace. Supply chain disruptions in key Asian manufacturing hubs and a renewed surge in energy prices have compounded domestic service inflation, leaving the Fed with limited room to ease policy without risking its credibility.
Market-implied probabilities for Fed policy have swung dramatically. Following Nomura's report, futures pricing for a December 2026 rate cut fell from a 65% probability to just 28%. The yield curve shifted higher, with the two-year Treasury yield jumping 18 basis points to 4.68%. The benchmark 10-year yield rose 14 basis points to 4.42%, widening the spread between the two to negative 26 basis points, a deeper inversion indicative of growth concerns.
A comparison of median bank forecasts before and after the April CPI data shows a clear hawkish pivot.
| Metric | Pre-April CPI (Q1 2026) | Post-April CPI (22 May 2026) |
|---|---|---|
| Median 2026 Rate Cut Forecast | 2 cuts (50 bps) | 0.5 cuts (12.5 bps) |
| Expected Fed Funds Year-End | 4.25%-4.50% | 4.63%-4.88% |
| Core CPI Forecast (Q4 2026) | 2.6% | 2.9% |
The policy shift stands in stark contrast to other developed markets. The European Central Bank is still expected to deliver one more 25-basis-point cut in 2026, while the Bank of Japan continues its gradual tightening from ultra-loose levels.
The primary second-order effect is a direct compression of equity valuations, particularly for long-duration growth stocks. Sectors reliant on cheap financing face headwinds; commercial real estate (VNQ), utilities (XLU), and highly leveraged consumer discretionary names could underperform. Technology megacaps with fortress balance sheets, like Apple (AAPL) and Microsoft (MSFT), are better insulated but not immune to multiple contractions. The financial sector (XLF) presents a mixed picture, with net interest margin benefits for banks potentially offset by rising credit loss provisions.
The main counter-argument to Nomura's view is that recent inflation data reflects transient shocks. A rapid resolution to supply chain issues or a sharper-than-expected slowdown in labor demand could give the Fed an opening for a late-year cut, making current market positioning overly pessimistic. Institutional flow data shows funds rotating into short-duration credit and energy equities while reducing exposure to rate-sensitive bonds and growth indices. Hedge funds have increased short positions in the iShares 20+ Year Treasury Bond ETF (TLT).
The immediate catalyst is the personal consumption expenditures report for April, due 30 May. This is the Fed's preferred inflation gauge, and another hot reading would validate Nomura's stance. The next Federal Open Market Committee meeting on 17 June will be critical for any shift in the official dot plot of rate expectations. The July 11 CPI report for June will be the final major data point before the Fed's late-July meeting.
Traders should monitor the 4.50% level on the 10-year Treasury yield, a break above which could signal a move toward 4.75%. For the U.S. dollar, the DXY index holding above 105.50 would confirm a sustained bullish trend driven by rate differentials. A close below 104.00 would suggest the market is dismissing the hawkish narrative.
Nomura's forecast implies mortgage rates will remain elevated or climb further. The average 30-year fixed mortgage rate, which closely tracks the 10-year Treasury yield, is likely to stay above 7.0% for the remainder of 2026. This will continue to pressure housing affordability and suppress transaction volume in the existing home market, providing a tailwind for homebuilder stocks focused on new construction to address inventory shortages.
The current projected pause at the terminal rate is most analogous to the period from December 2015 to December 2016. During that cycle, the Fed hiked once in December 2015 and then held rates steady for a full year despite market expectations for additional hikes. A key difference is the starting inflation level; core PCE was at 1.4% in 2015 versus over 2.8% today, giving the current Fed far less flexibility.
Sustained high rates will increase the cost of refinancing for corporations facing maturity walls. Investment-grade issuers with near-term debt coming due may accelerate issuance to lock in current rates, leading to a temporary supply surge. For high-yield issuers, particularly those rated CCC+ and below, borrowing costs may become prohibitive, increasing the risk of distressed exchanges or defaults, especially in the leveraged loan market.
Nomura's zero-cut forecast signals that the battle against inflation is not over, forcing a fundamental repricing of risk assets for a prolonged high-rate environment.
Disclaimer: This article is for informational purposes only and does not constitute investment advice. CFD trading carries high risk of capital loss.
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