TD Securities’ US Economic Outlook suggests a higher-for-longer Federal Reserve stance that is typically supportive for the US Dollar. The bank sees stagflationary risks from the Iran conflict, elevated Oil prices, and stressed supply chains keeping inflation high and preventing rate cuts in 2026. Disinflation and renewed easing are only expected from 2027.

Stagflation risks backstop Dollar rates

“We expect output growth to move sideways this year, reflecting the conflict in Iran. The conflict presents stagflationary risks which we expect will keep the Fed on hold for the entire year. AI and high-income consumers have supported underlying growth.”

“With the Iran conflict in a stalemate, oil prices still high, and supply chains stressed, we do not see inflation progress as feasible this year. We expect core CPI inflation to peak at 3.0% y/y in Q4 2026, ending the year higher than it started. The numbers are similarly high in core PCE terms. Most of the impact of higher oil prices will filter into headline inflation. We look for gradual disinflation to resume in 2027.”

“The outlook will be fluid amid uncertainty around developments in Iran and the Trump administration’s execution of new trade, fiscal, regulatory, and immigration policies. New developments in financial markets and further escalation of geopolitical conflicts remain key risks for our economic projections over the forecast horizon.”

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