Inflation is expected to remain the Federal Reserve’s primary concern for the rest of 2026. However, according to Christopher Hodge, Chief Economist for the U.S. market at Natixis, the Fed may continue to hold interest rates steady rather than rush into further monetary tightening.

Meanwhile, U.S. sanctions, unpredictable trade policies, and concerns over the country’s fiscal outlook are encouraging more central banks to diversify their reserves toward gold.

The Fed May Remain on Hold

According to Hodge, the Fed needs to distinguish between two types of price pressure:

• Short-term shocks caused by tariffs and energy prices.

• Persistent domestic inflation that reflects the underlying strength of the economy.

Current data do not suggest that domestic inflationary pressures are intensifying significantly. Housing costs, which account for approximately 35% of the CPI, are expected to continue easing. Wage growth of around 3% to 3.5% is also considered broadly consistent with inflation near the Fed’s 2% target.

In addition, recent core PCE, economic growth, and labor market data have all come in weaker than expected. Natixis therefore believes the Fed’s most prudent option may be to keep interest rates unchanged throughout 2026 while waiting for the effects of external price shocks to gradually fade.

Warsh May Have Started With an Overly Hawkish Stance

Fed Chair Kevin Warsh adopted a firm stance on price stability from the beginning of his tenure.

According to Hodge, this approach could create a “credibility trap.” If CPI unexpectedly rises again in the coming months, the Fed may face pressure to raise interest rates in order to defend its anti-inflation message, even if other economic indicators do not support further tightening.

However, the likelihood of a July rate hike remains low. The Fed took no action in June, while the latest data suggest that economic growth, employment, and price pressures are beginning to weaken.

U.S. Policies Continue to Drive Gold Demand

The trend of central banks diversifying their reserves away from the U.S. dollar became more pronounced in 2022 and continues to be supported by several factors:

• Financial sanctions.

• Unpredictable U.S. trade policies.

• Concerns over the U.S. fiscal outlook.

• A desire to reduce dependence on dollar-denominated assets.

This process does not necessarily involve direct selling of U.S. dollar reserves. Instead, some countries may simply choose not to fully reinvest their dollar holdings as they mature, a process described as a “quiet withdrawal.”

This creates additional room for gold to strengthen its role as a reserve asset that is not tied to the obligations of any single government.

The U.S. Dollar Still Holds a Central Role

Although central bank demand for gold may continue to rise, the U.S. dollar has not lost its core position in the global financial system.

The size of U.S. financial markets, the attractiveness of American assets, and the innovative strength of the private sector continue to generate substantial demand for the greenback. As a result, reserve diversification is likely to occur gradually rather than through a sudden withdrawal from the dollar.

Fortunately, the international monetary system does not rebalance its portfolio overnight like an undisciplined trading account.

Conclusion

Natixis currently favors a scenario in which the Fed keeps interest rates unchanged throughout 2026, as domestic inflation has not shown clear signs of accelerating and the economy appears to be slowing.

At the same time, unpredictable U.S. policies and the desire to reduce dependence on dollar-denominated assets continue to support gold purchases by central banks.

However, this remains a forecast rather than an official Fed decision. The outlook for interest rates and gold prices will continue to depend on inflation, economic growth, labor market conditions, and monetary policy signals in the months ahead.

Source: Reuters