Key Takeaways
A senior Federal Reserve official has broken ranks with prevailing market sentiment, suggesting the central bank could cut interest rates as many as four times in 2026 despite mounting inflation fears stemming from the Iran war.
"I tend to support the Fed cutting rates three times this year, (but the FOMC) may cut rates four times," Federal Reserve Governor Milan said in a statement. The governor added that it is "reasonable" to expect core goods prices and housing inflation to continue their decline.
The commentary offers a starkly different outlook from other Fed officials and recent data that have rattled investors. Chicago Federal Reserve President Austan Goolsbee said Tuesday the central bank may need to wait until 2027 to cut rates if high oil prices persist. This concern is rooted in the Cleveland Fed's Inflation Nowcasting tool, which, as of April 8, projected the annual inflation rate to hit 3.56% in April, a dramatic increase from 2.40% in February.
Governor Milan's dovish stance directly challenges the market's narrative of a hawkish Fed forced to delay easing. The governor argued that the energy shock, which has seen U.S. gasoline prices surge 40% in five weeks to over $4 a gallon, has not altered the 12 to 18-month inflation outlook. "From now, a year from now, the 12-month PCE is likely to be near our 2% target," Milan stated, adding there is no evidence of a wage-price spiral and that long-term inflation expectations remain "anchored."
This division within the Federal Open Market Committee comes as investors grapple with the war's economic fallout. Iran's closure of the Strait of Hormuz has disrupted 20% of the world's daily oil supply and sent West Texas Intermediate crude surging, threatening corporate production costs and consumer spending.
While Governor Milan sees a path to lower rates, others like San Francisco Fed President Mary Daly have adopted a more cautious tone, acknowledging a wide range of possibilities. For now, the Fed's benchmark rate remains in a 3.50%-3.75% range. Milan’s remarks suggest that if his view gains traction, it could fuel a rally in equity markets and weaken the dollar, challenging the higher-for-longer rate expectations that have recently dominated trading.
This article is for informational purposes only and does not constitute investment advice.
