According to DBS Bank's investment outlook from its Chief Investment Office, its Chief Investment Officer, Hou Weifu, stated that U.S. inflation data and political pressures could lead to a divergence in policy direction within the Federal Open Market Committee (FOMC) led by Chair Jerome Powell. Strong U.S. economic data and persistently high inflation pressures may prompt the Federal Reserve to keep the federal funds rate elevated, potentially adopting a more hawkish stance than anticipated. DBS Group no longer expects the Federal Reserve to cut interest rates in 2026 and anticipates rates will remain unchanged in 2027.
The bank noted that recent developments are prompting investors to reassess the long-standing core allocations of their investment portfolios. The past 18 months have shown a growing gap between political expectations and actual policy outcomes, particularly concerning geopolitics, fiscal discipline, and inflation. Global tensions have not eased, and fiscal policies have not returned to prudence. On the contrary, current U.S. policies are further increasing geopolitical risks and defense spending, leading to a continued expansion of the fiscal deficit. These developments reflect a macroeconomic environment more susceptible to inflation than markets currently anticipate.
DBS Bank pointed out that geopolitical tensions, especially conflicts in the Middle East, have profound impacts on the macroeconomy. The intensification and prolongation of conflicts are leading to persistently high energy prices, and as inventories decline, the vulnerability of oil supply is becoming increasingly apparent. Simultaneously, fiscal expansion related to defense industry policies is further exacerbating the risk of upward inflation pressure. Against this backdrop, investors appear to be underestimating inflation risks or are overly optimistic.
The bank mentioned that, beyond the energy sector, another short-term inflation driver stems from the artificial intelligence (AI) investment boom. Although AI holds promise for boosting productivity, it is currently in a capital-intensive phase with limited supply, meaning related benefits may take a considerable time to materialize. In the short term, the AI boom is increasing inflationary pressures, as related infrastructure drives up demand for software, electronic components, and electricity. With anti-inflation policies and rising commodity raw material costs due to the Iran crisis, price pressures are gradually stabilizing, and China is also a factor contributing to inflation.
DBS Bank indicated that the aforementioned developments are prompting central banks to adopt a more hawkish stance. Recent policy signals from major central banks reflect this shift, including the Federal Reserve, the European Central Bank, and the Bank of England, which are all pivoting towards a more hawkish or neutral policy orientation. Market pricing also shows the possibility of another rate hike before the end of the year.
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