Federal Reserve may soon have to abandon its dovish stance and potentially shift toward tighter monetary policy as inflation remains persistent and the U.S. labor market continues to hold firm, according to Yardeni Research.
The research firm said prospects for interest rate cuts in 2026 are now “essentially off the table,” citing renewed inflation pressures, inflation staying above the Fed’s 2% target for five consecutive years, rising costs linked to the expansion of AI infrastructure, and continued labor market stability.
Investors Eye June Fed Meeting for Policy Shift
Yardeni Research said financial markets increasingly view the Federal Open Market Committee meeting on June 16-17 as the likely moment when policymakers officially remove their easing bias.
The firm pointed out that the two-year Treasury yield has already climbed above the effective federal funds rate, which it said may indicate current policy settings are no longer restrictive enough to slow inflation.
Producer Price Data Strengthens Hawkish Outlook
The shift in expectations was reinforced by April’s producer price index report, according to Yardeni.
Final demand producer prices rose 1.4% from the previous month and 6.0% from a year earlier, representing the fastest annual increase since December 2022 and coming in well above market expectations.
Inflationary pressures in transportation intensified as truck freight costs jumped 8.1% month over month, the sharpest increase since 2009, while service-sector prices recorded their largest monthly gain in four years.
Firm Still Expects Limited Fed Moves This Year
Despite adopting a more hawkish tone, Yardeni Research said it still expects a “none-and-done” scenario for the remainder of the year, implying the Fed could hold rates steady without further policy action.
The firm said moderating wage growth, productivity gains helping contain labor expenses, and stable long-term inflation expectations could help offset inflation risks.
Treasury Yields Seen Climbing Further
Nevertheless, Yardeni warned that the possibility of a future rate increase is continuing to rise.
The firm also forecast that the yield on the 10-year U.S. Treasury note could move toward 4.60% in the near term.
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