Fed Expected to Delay Rate Cuts Amid Rising Inflation Pressures
The Federal Reserve is likely to hold off on cutting interest rates for at least six months, according to a recent Reuters poll of economists. The delay comes as war-driven energy shocks push inflation higher, complicating the central bank’s policy outlook.
War-Driven Inflation Disrupts Market Expectations
The ongoing conflict in the Middle East, now nearing two months, has triggered a sharp rise in fuel prices. This surge has weakened consumer confidence to record lows and forced markets to scale back expectations for near-term rate cuts. Inflationary pressures, particularly in energy, remain a key concern.
Fed Officials Signal Caution on Rate Cuts
Even the more dovish policymakers within the Fed have acknowledged that inflation remains persistently high. This has reduced the urgency for monetary easing. As a result, economists have once again postponed their expectations for when the first rate cut might occur.
Economists Still Expect Limited Easing
Despite the delay, most economists still anticipate at least one rate cut in the future. However, their inflation outlook is more moderate compared to households, which continue to experience sharper increases in everyday costs, especially in gasoline and energy.
Poll Data Shows Shift in Rate Expectations
In the April 17–21 Reuters survey, 56 out of 103 economists projected that the Fed’s benchmark interest rate would remain within the 3.50%–3.75% range through September. This marks a notable shift from late March, when nearly 70% expected at least one rate reduction by that time. Earlier polls in March had even suggested a possible cut by June.
Year-End Outlook Remains Uncertain
There is still no clear consensus on where interest rates will end the year. However, 71 economists expect at least one rate cut, with the median forecast pointing to a single reduction. This aligns with the Fed’s latest dot-plot projections. Meanwhile, nearly one-third of economists now believe rates may remain unchanged throughout the year, almost double the previous survey’s figure.
Leadership Transition Adds Another Layer of Uncertainty
The survey was conducted largely before the confirmation hearing of Kevin Warsh, who has been nominated by Donald Trump to succeed Jerome Powell. Economists noted that Warsh’s testimony did not significantly alter their outlook.
Warsh rejected claims that he would automatically lower rates but called for broader changes in the Fed’s approach. Analysts emphasized that any policy shift would require consensus within the Fed’s decision-making committee.
Analysts Highlight Inflation Risks
According to Michael Gapen of Morgan Stanley, inflation linked to tariffs and oil prices may be temporary, allowing the Fed to ease policy later in the year. However, he warned that if inflation proves more persistent, the Fed could remain on hold.
Economists from Deutsche Bank and Vanguard echoed similar views, noting that changes in leadership alone are unlikely to significantly shift monetary policy direction.
Inflation Outlook Remains Above Target
The Fed’s preferred inflation measure, the Personal Consumption Expenditures (PCE) index, is now expected to rise by 3.7% in Q2, 3.4% in Q3, and 3.2% in Q4. These figures are about 0.3 percentage points higher than previous estimates and remain well above the Fed’s 2% target.
While these upward revisions are relatively modest, they contrast sharply with consumer expectations, which are closer to 5% inflation over the next year. This gap raises concerns about inflation expectations becoming unanchored.
Growth and Labor Market Outlook Stable
Despite inflation concerns, forecasts for economic growth and unemployment remain largely unchanged. The unemployment rate is expected to average around 4.3%, while economic growth is projected to hold steady near 2%.
