Economists are pushing back their expectations for Federal Reserve interest rate cuts. A new Reuters poll shows a sharp shift in sentiment, with the majority now believing the central bank will hold rates steady well into next year.
The poll, conducted from May 14 to 19, surveyed 101 economists. Of those, 83 predicted the federal funds rate would remain stable between 3.50% and 3.75% until the end of the third quarter. This is a notable change from just last month, when slightly more than half of economists held that view.
Rate Cut Hopes Fade
The shift in sentiment is stark. In the previous month, over two-thirds of survey participants expected at least one rate cut this year. In the latest survey, that figure dropped to less than half. Almost half of the economists polled now believe the Fed will not cut rates at all before 2026. About a third still forecast a single cut, likely in December. Four economists even predicted a rate hike.
This growing caution is not limited to economists. Futures markets have started pricing in a 25 basis point interest rate hike by the end of January. Meanwhile, the US 10-year Treasury yield climbed above 4.6%, hitting its highest point in a year.
Inflation and the Iran Factor
A key driver of this cautious outlook is the inflationary pressure from rising energy prices. Economists largely believe this pressure, triggered by the ongoing US war with Iran, is temporary. Approximately 86% of those surveyed hold this view.
Scott Anderson, Chief Economist at BMO Capital Markets, offered a word of caution. He noted that economists have recently struggled to predict inflation accurately. He warned the global economy may have entered a new phase with more frequent economic shocks.
The Federal Reserve’s preferred inflation gauge, the Personal Consumption Expenditures (PCE) price index, sits at 3.5% year-on-year. That is the highest since May 2023 and well above the Fed’s 2% target. Economists expect PCE inflation to fall, but slowly, to 3.9% in Q2, 3.7% in Q3, and 3.4% by year-end. These estimates mark the third consecutive upward revision, coming in about 25 basis points higher than last month.
Fed Policy Under Pressure
At the Fed’s April meeting, three policymakers voted against removing language that hinted at future rate cuts. One member even directly called for a reduction. But since then, Fed officials have hardened their stance on keeping rates stable. They cite the uncertainty from the Iran conflict.
Bank of America’s Head of US Economics, Aditya Bhave, summed up the situation. He said both rate increases and decreases are possible, but the base scenario is a “wait-and-see” approach. If a cut comes, Bhave sees it as more likely next year than this year.
Furthermore, economists believe it is unlikely that incoming Fed Chairman Kevin Warsh will implement the aggressive rate cuts demanded by President Donald Trump.
The survey showed little change in other economic outlooks. US unemployment is expected to hover around 4.3%. Economic growth is projected to average around 2%.
This is not investment advice.
