Federal Reserve expected to hold rates steady this year, BMO economist says, with cuts seen in 2027

The Federal Reserve isn’t touching that dial anytime soon. Jennifer Lee, Senior Economist at BMO Capital Markets, expects the central bank to keep interest rates exactly where they are for the rest of 2026, with the first cuts not arriving until late 2027.

For anyone hoping cheaper borrowing costs were right around the corner, the forecast amounts to a polite but firm “not yet.” And given Lee’s roughly three decades at BMO watching the Fed’s every move, her read on the situation carries weight.

A new chair, the same patience

The projection lands at an interesting moment for the Fed. Kevin Warsh, nominated by President Trump, was confirmed and sworn in as Fed Chair on May 22, 2026. New leadership often raises questions about whether the central bank’s direction might shift.

BMO’s outlook envisions yields averaging around 4.25% in a post-cut environment, whenever those cuts eventually materialize. That number implies the firm expects any easing to be gradual rather than aggressive, a slow descent rather than a cliff dive.

Geopolitics muddying the waters

Lee flagged global developments as a complicating factor, specifically pointing to the conflict in Iran as a potential influence on the Fed’s calculus. Geopolitical instability tends to create unpredictable supply-side shocks, particularly in energy markets, which feed directly into inflation readings.

BMO’s mid-2026 scenarios account for this uncertainty by building in flexibility. The firm’s models suggest any future rate adjustments will be heavily informed by prevailing economic indicators at the time, rather than locked into a predetermined schedule.

What steady rates mean for markets

A prolonged rate hold has cascading implications across asset classes. For fixed-income investors, it creates a relatively predictable environment. Bond yields remain elevated by recent historical standards, making traditional debt instruments more attractive than they were during the near-zero rate era.

With rates staying put through 2026, the incentive structure tilts away from speculative assets. A 4%-plus yield on government bonds is real competition for capital that might otherwise flow into crypto. Significant inflows may wait until the central bank signals a definitive shift toward easing, something Lee’s timeline pushes well into the second half of 2027.

For market participants keeping a close eye on macro trends, the key dates to watch will be Fed meeting schedules through early 2027, when economic data may finally accumulate enough momentum to justify the first cut.

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