---
title: "More Than Just \"No Rate Cut\"! In These Three Scenarios, the Fed Could Even Resume Hiking Rates"
type: "News"
locale: "en"
url: "https://longbridge.com/en/news/286837310.md"
description: "Barclays' latest analysis shows that the Fed's base case remains a rate cut in March 2027, but the prerequisites are extremely stringent, with only a 35% probability. The three paths triggering rate hikes are also clear: long-term inflation expectations becoming unanchored; core inflation remaining persistently high after the impact of tariffs fades; and demand outpacing supply, especially if the AI investment cycle and wealth effects materialize before productivity improvements"
datetime: "2026-05-19T01:26:42.000Z"
locales:
  - [zh-CN](https://longbridge.com/zh-CN/news/286837310.md)
  - [en](https://longbridge.com/en/news/286837310.md)
  - [zh-HK](https://longbridge.com/zh-HK/news/286837310.md)
---

# More Than Just "No Rate Cut"! In These Three Scenarios, the Fed Could Even Resume Hiking Rates

A rate hike by the Fed this year is still not the base case, but it is no longer just a tail risk. Obstructions in the Strait of Hormuz have pushed up commodity prices, while AI-related capital expenditures are squeezing parts of the global supply chain. The market has begun to reprice a "hawkish pivot": the probability of a rate hike before the December 2026 FOMC meeting has exceeded 60%, and a single rate hike is fully priced in by March 2027.

According to Zhuifeng Trading Desk, Jonathan Millar and others from Barclays' FICC Economic Research stated in their May 18 Fed commentary: "Although our base case does not anticipate a rate hike before the end of 2027, the upside risks to the policy rate have intensified." **The three paths triggering rate hikes are also clear: long-term inflation expectations becoming unanchored; core inflation remaining persistently high after the impact of tariffs fades; and demand outpacing supply, especially if the AI investment cycle and wealth effects materialize before productivity improvements.**

The base path remains relatively dovish: the Fed keeps rates unchanged until 2026, with the next move being a 25 basis point rate cut in March 2027. This judgment relies on two premises: disruptions in the Strait of Hormuz end quickly, and tariff pass-through and energy-related price pressures subside; meanwhile, consumer spending slows down, leading to a cooling of aggregate demand.

However, the probability distribution has become far from "dovish." In subjective scenarios, the probability of a 25 basis point rate cut in 2027 is 35%; the probability of rates remaining unchanged until the end of 2027 is 30%; the probability of a rate hike scenario is 25%, with an magnitude of approximately 50-100 basis points; and the probability of a recession triggering significant rate cuts is 10%. In other words, the most likely deviation is not an immediate rate hike, but a delay in rate cuts.

## **The Market No Longer Views Rate Hikes as a Tail Risk**

Changes in the interest rate market are direct. Before the Iran conflict, the market was still digesting expectations for further rate cuts; since then, pricing has rapidly shifted toward hike risks.

The underlying variables are not limited to a single oil price shock. ISM manufacturing and services paid prices, along with the New York Fed's Global Supply Chain Pressure Index, are all showing rising cost pressures; meanwhile, the US labor market has not deteriorated significantly, with the unemployment rate remaining in a low range, and the three-month average of non-farm payrolls still giving an impression of "relative stability."

This poses a dilemma for the Fed. If it were merely a one-time shift in the price level, policy could "look through" it; but if the shock persists long enough, inflation expectations, wages, and corporate pricing behaviors begin to follow suit, transforming the issue from a supply shock into inflation inertia.

## **The Shortest Path to a Rate Hike: Long-Term Inflation Expectations Become Unanchored**

The most direct trigger is when long-term inflation expectations begin to loosen.

**What needs to be monitored is not the CPI for one or two months, but market-based inflation expectations over 5-10 years, particularly the 5y5y inflation breakeven rate.** If such indicators continue to rise, with erratic trends decoupled from short-term inflation changes, the Fed will view this as a signal that the credibility of its 2% inflation target is compromised. If long-term inflation expectations in surveys from the University of Michigan, the New York Fed, and others rise simultaneously, this judgment will be reinforced.

We are not at that point yet. Long-term inflation breakeven rates do not yet show that the Fed's credibility is being questioned, although survey-based long-term inflation expectations are somewhat elevated. The real risk lies in disruptions in the Strait of Hormuz and commodities dragging on for too long and with too great an amplitude, leading the market to doubt whether the Fed is still willing to pay the price in terms of growth and employment to achieve the 2% target.

If such signs appear, policy communication will likely turn hawkish first. The Fed will not wait until all data confirms the trend before alerting the market.

## It’s Troublesome If Core PCE Doesn’t Fall After Tariff Pressures Subside

The second path is slower but more realistic: core inflation repeatedly exceeding expectations.

The key threshold given in the framework is a month-on-month core PCE of approximately 0.18%, which is roughly consistent with the monthly pace aligned with the 2% target. If core PCE remains consistently above this level while tariff-related pressures are theoretically beginning to fade, the Fed's room for continued wait-and-see will be compressed.

Several sub-items are more important: core goods have not shown the expected disinflation; core services excluding housing, so-called "supercore," have cooled only limitedly; global supply chain pressures are rising again; and trimmed mean or median inflation indicators are starting to strengthen, indicating that pressure is no longer concentrated in a few items.

**The keyword for this path is "persistent." Single-month data is insufficient, and even a few months may not be enough; but if it persists for several quarters, the Fed will find it difficult to explain it away as temporary disturbances.**

There is also a fork here: if inflation is high while demand is strong, policy inclination will shift toward tightening; if demand has already weakened significantly while inflation remains high, the Fed's dual mandate will come into conflict. However, after the inflation shock of 2021-2022, the threshold for not prioritizing price stability is very high.

## **AI May Boost Demand First, Rather Than Immediately Lowering Inflation**

The third path has less to do with Middle East conflicts and more to do with domestic US demand.

**The AI investment cycle is accelerating. Private domestic final purchasers have not slowed down significantly, AI-related investments have regained momentum this year, and financial conditions are also supportive of growth according to the Fed's model. If AI-driven capital expenditures and stock market wealth effects materialize before productivity and cost efficiency improvements, the result may not be declining inflation, but rather demand surging first.**

This differs from the technology narrative of the Greenspan era. At that time, productivity gains were difficult to identify in real time, supply improvements occurred first, and demand responses lagged; this time, the potential productivity benefits brought by AI have been fully anticipated by the market and reflected in financial conditions and spending behavior.

Data also presents two sides. Non-farm business sector productivity grew by nearly 3% over the four quarters ending in Q1 2026, about twice the pre-pandemic pace; however, utilization-adjusted indicators from the San Francisco Fed suggest that this growth rate may be overestimated by about 1.5 percentage points. In other words, superficial supply improvements may not be sufficient to support demand that has been released in advance.

The Fed will judge whether there is overheating based on several traditional signals: growth exceeding trend, the unemployment rate falling below the 4.0%-4.3% NAIRU range, wages re-accelerating, and wage increases outpacing actual productivity. Currently, evidence of wage re-acceleration is not strong, but this clue already needs to be monitored.

## **Base Case Remains a Rate Cut in 2027, But Prerequisites Are Stringent**

The base case has not changed: holding steady for an extended period, followed by a 25 basis point rate cut in March 2027. The logic is that only by then, when energy, tariff, and supply chain-related price pressures recede and core PCE slows significantly, will the Fed have the space to align the policy rate with the long-term neutral rate.

This path is highly sensitive to the duration of disruptions in the Strait of Hormuz. If disruptions are brief and tariff pass-through gradually fades, the window for rate cuts can still open; if disruptions prolong, core inflation and inflation expectations will close the window first.

Consumption is equally critical. Real household disposable income has slowed significantly over the past year, mainly due to slowing job growth; if labor supply growth continues to slow, consumer spending should also cool. If this assumption fails, and AI capital expenditures and wealth effects continue to support demand, the Fed will face a harder judgment: whether current policy is tight enough.

Therefore, the Fed's risk in 2026 is not simply switching from "rate cuts" to "rate hikes." A more accurate description is: the rate cut path is being squeezed simultaneously by supply shocks, core inflation stickiness, and AI demand spillovers. Rate hikes require harder data triggers, but they have returned to the policy table.

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