Inflation to stay sticky, Jahangir Aziz rules out Fed rate cuts in 2026

As geopolitical tensions intensify and crude oil markets react sharply, investors are facing a complex mix of inflation risks, monetary policy uncertainty, and shifting global supply dynamics. In a conversation with ET Now, economist Jahangir Aziz from JPMorgan suggested that the current situation is far more layered than what headline indicators like Brent crude prices may imply. Speaking on the scale of the escalation, Aziz said, “Look, it is very difficult to say how bad or how big it is going to be or how long it is going to last.” He noted that while the recent spike in oil prices reflects rising market anxiety, “the spike in the oil market clearly shows you that the market is nervous… but that is not the story.” According to him, the global oil market has become increasingly fragmented, making widely tracked benchmarks less relevant for key economies. “The oil market has been fragmented completely… Brent reflects the Atlantic Basin, but countries like China and India depend on the Middle East,” he said, adding that regional benchmarks tell a more accurate story. “Oman and Dubai prices were already above 150… and the India basket was at $145,” Aziz pointed out, concluding that “we need to stop looking at Brent… Oman and Dubai prices are what really matter for Asian economies.”

On the US Federal Reserve’s policy outlook, Aziz pushed back against expectations of easing, maintaining that his view has consistently ruled out rate cuts this year. “We did not have a rate cut in 2026 in the beginning of the year and in fact, the next move would be a rate hike in 2027,” he said. He emphasized that this assessment is rooted in labour market dynamics rather than recent geopolitical developments. “This has nothing to do with the war… it was based on US labour market dynamics,” Aziz explained. Even modest job growth, he argued, could sustain inflationary pressures. “Even a modest improvement in jobs… will push wages up and keep inflation above 2%,” he said. He also highlighted a more cautious stance from the Fed on energy-driven inflation, noting that policymakers indicated they would not look through such price increases “too likely.”

Turning to bond markets, Aziz said the more important development is not just the rise in yields but the shift in expectations reflected in the yield curve. “The market took the Fed call in a hawkish tone… and flattened the curve,” he observed, adding that “it is the flattening… rather than the move up in the 10-year rate that is the bigger story.” As inflation concerns persist and hopes for rate cuts fade, he expects this trend to continue. “As hopes of rate cuts in 2026 fade… you are going to see much more flattening,” he said. Aziz also warned that if inflation becomes entrenched, it could start affecting demand. “If inflation becomes sticky… you are going to start seeing demand destruction,” he said, adding that even the anticipation of such a slowdown could influence market pricing. “In a demand destruction environment… it is hard to see the 10-year actually blow up,” he noted.

Overall, Aziz’s assessment points to a more complex global backdrop where traditional indicators may not fully capture underlying risks. With oil markets fragmenting, inflation staying persistent, and central banks remaining cautious, investors may need to look beyond surface-level signals to navigate the evolving landscape.