While expectations are growing that the Fed will not cut interest rates this year, economists believe that the inflationary pressure triggered by rising energy prices following the Iran war will be temporary.
According to a Reuters poll conducted between May 14-19, the majority of economists expect the Fed to keep its policy interest rate at current levels until 2026. Of the 101 economists surveyed, 83 predicted the federal funds rate would remain stable between 3.50% and 3.75% until the end of the third quarter. This was slightly more than half in last month’s poll.
The survey results indicated a significant shift in market expectations. While more than two-thirds of economists expected at least one interest rate cut this year last month, that figure dropped to less than half in the latest survey. Nearly half of the participants believe the Fed will not take any action before 2026. About a third expect a single rate cut at the end of the year, largely in December. Four economists predicted at least one rate hike.
On the other hand, futures markets have begun pricing in a 25 basis point interest rate hike by the end of January. The US 10-year Treasury yield also rose above 4.6%, reaching its highest level in the past year.
Bank of America’s Head of US Economics, Aditya Bhave, said that both interest rate increases and decreases are on the table, but the base scenario is a “wait-and-see” approach. Bhave stated that if the Fed’s next move is an interest rate cut, it is more likely to happen next year than this year.
At the Fed’s April meeting, three policymakers voted against removing any statements indicating interest rate cuts, while one member directly called for a rate cut. However, since then, Fed officials have strengthened their tendency to keep interest rates stable, citing the uncertainty created by the ongoing US war with Iran.
Economists believe it is unlikely that the incoming Fed Chairman, Kevin Warsh, will implement the aggressive interest rate cuts demanded by President Donald Trump.
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The Federal Reserve’s preferred inflation indicator, the Personal Consumption Expenditures (PCE) price index, was most recently reported at 3.5% year-on-year. This is the highest level seen since May 2023 and remains well above the Fed’s 2% target.
Economists expect PCE inflation to fall to 3.9% in the second quarter, 3.7% in the third quarter, and 3.4% by the end of the year. These estimates, which point to levels about 25 basis points higher than last month, mark the third consecutive upward revision.
However, approximately 86% of the economists surveyed maintain the view that current inflationary pressures are temporary. Scott Anderson, Chief Economist at BMO Capital Markets, noted that economists have recently failed to accurately predict inflation, warning that the global economy may have entered a new phase where it could face more frequent shocks.
The survey showed no significant changes in unemployment and growth forecasts. Unemployment in the US is expected to hover around 4.3% in the coming years, while economic growth is projected to average around 2%.
*This is not investment advice.
