RBC Economics expects only small changes to the US outlook. The near-term unemployment forecast is slightly lower, while the 2026 annual average remains 4.5%.
Upside US GDP growth surprises in the second half of 2025 are linked to higher productivity rather than more jobs or hours. Signs of stabilising labour markets in early 2026 have eased concerns about deterioration.
Data Delays And Inflation Signals
A partial US government shutdown has delayed annual benchmark population adjustments used in unemployment data, and January Consumer Price Index data. Business surveys have reported price rises, and core goods inflation is expected to heat up more into Q2.
The Federal Reserve is expected to keep policy steady in 2026 while allowing for future rate cuts from current levels. The Fed held rates steady in January and is taking a meeting-by-meeting approach.
Chair Powell described rates as “loosely neutral or somewhat restrictive” and said earlier cuts should address risks on both sides of its mandate. The Fed funds range is expected to remain at 3.5%–3.75% through 2026.
Uncertainty around US protectionist trade policy remains, with lagged tariff effects still in play. A US Supreme Court ruling on the legal status of IEEPA tariffs could affect tariff pass-through assumptions and the core goods inflation outlook.
Trading Approaches In A Steady Rate Regime
With the Federal Reserve expected to keep rates steady, we see opportunities in strategies that profit from low interest rate volatility. The Fed funds range will likely remain between 3.5% and 3.75% for the rest of 2026, creating a predictable environment for short-term rates. Selling near-term options on SOFR futures could be an effective way to collect premium as long as the economic data, like last week’s steady 185,000 jobs added in January, doesn’t force a policy shift.
However, significant uncertainty is bubbling just beneath the surface, making it wise to purchase protection against sudden market swings. The CBOE Volatility Index (VIX) has been trading in a compressed range near 14, which is historically cheap given the upcoming Supreme Court ruling on IEEPA tariffs and the delay in January’s CPI data. Buying VIX call options or out-of-the-money puts on major indices offers a cost-effective hedge against a potential shock in the coming weeks.
We believe the equity markets could remain range-bound for now, caught between stable rates and rising inflation fears. This environment is suitable for iron condors on the S&P 500, which profit from the index staying within a specific price channel. The recent January Producer Price Index, which showed an unexpected 0.5% increase, supports our view that core inflation will heat up into the second quarter, making this a trade with a limited time horizon.
Looking further out, the nomination of Kevin Warsh to take over as FOMC Chair in June introduces a known communication risk. We are already seeing slightly higher implied volatility priced into options dated for June and beyond, reflecting this transition. Traders should consider the different communication style Warsh may bring when structuring positions that extend into the second half of the year.
This wait-and-see stance from the Fed stems from the productivity-driven GDP growth we saw in the second half of 2025, which didn’t overheat the labor market. Because rates are described as “loosely neutral,” the bias remains toward an eventual cut rather than a hike. This underlying dovish tilt suggests that in any sharp market sell-off, the Fed is more likely to provide support than to tighten policy.
