The ongoing war between the US and Iran has reignited inflation concerns in the US. While inflation is still far from the Fed’s 2% target, it had seen a significant decline last year.
However, the war increased the risk of inflation rising again, while expectations of a Fed interest rate cut decreased.
However, a Reuters poll revealed that expectations for a Fed interest rate cut remain.
Economists surveyed by Reuters said that despite concerns that the war in the Middle East will lead to inflation, they expect the Fed to keep interest rates steady until September and to implement at least one rate cut later in the year.
In contrast, financial markets have completely ruled out the possibility of an interest rate cut in 2026, while estimating the probability of an interest rate increase at approximately 30%.
This situation stems from a more than 40% increase in crude oil prices during the four weeks of the US-Iran conflict.
Economists believe the impact of the energy shock will be limited and short-lived.
After the Fed kept interest rates steady at 3.50%-3.75% last week, a number of Fed members argued that the risk of high inflation remains the top priority, suggesting that a rate cut is unlikely in the near future.
Although a Reuters poll generally indicated an expectation of an interest rate cut, the results show a wide divergence in end-2026 interest rate forecasts, with participants divided into four groups.
“28 people expect one interest rate cut, 37 people expect two, and 4 people expect three. Thirteen people do not expect any change in interest rates this year, meaning no interest rate cuts.”
Nearly three-quarters of economists (61 out of 82) predict the Fed will not change interest rates in the next quarter.
Speaking to Reuters, Barclays senior US economist Jonathan Millar said, “It will take longer than expected for the Fed to think that inflation has rebounded in line with its 2% target. We don’t think this will happen until September. The most likely scenario is that the Fed will wait longer for oil prices and postpone interest rate cuts until next year.”
*This is not investment advice.
