Economists who counsel institutional investors are sharply divided over whether the U.S. economy will cool enough in the second half of 2026 to prompt the Federal Reserve to cut rates - or whether rising inflation, robust investment and a strengthening labor market will instead push the central bank toward additional hikes.
Those differences of view are particularly apparent at a moment when geopolitics and market swings complicate the outlook. Global benchmark oil prices, which surged more than 70% amid U.S.-Iran hostilities, have since tumbled and, following a U.S.-Iran deal reopening the Strait of Hormuz, have fallen to below $80 a barrel - roughly 10% higher than levels before Iran briefly shut the strategic passage.
Chris Hodge, head U.S. economist at Natixis CIB Americas, argues that the next Fed move will be toward easier policy. "For Fed rate policy 'the next move will be lower. (Inflation) expectations are anchored, real wage gains are negative,'" he said, and he anticipates two quarter-point rate cuts in the coming months as consumer strain from falling inflation-adjusted wages becomes evident.
Citi economists similarly lean toward a dovish tilt, projecting sequential quarter-point reductions at Fed meetings in September, October and December.
By contrast, Robert Sockin, chief economist at PGIM, expects the Fed to raise rates three times, pointing to an economy that "continues to power along with above-trend growth, above-target inflation, and now a warming labor market" that after a sluggish start to the year is producing jobs at a pace more comparable to the pre-pandemic period.
That gulf of professional opinion reflects a broader mix of uncertainties currently buffeting forecasts. Policymakers and analysts are weighing the economic effects of an unsettled regime of import taxes that remains under court challenge even as the president seeks new ways to impose tariffs. At the same time, large-scale investment in artificial intelligence sits alongside a longer-term trend of a shrinking share of economic growth going to labor.
The immediate policy test comes as Kevin Warsh takes the helm at the Fed. His first meeting as chair concludes on Wednesday, and while the central bank is widely expected to keep the target range at 3.50%-3.75%, markets and analysts will scour the new set of economic projections and Warsh's first press conference for clues about whether the Fed sees disinflationary momentum taking hold or growing upside risks to inflation that would require tighter policy.
Most forecasters anticipate the new projections will indicate the Fed staying on the sidelines through the year, albeit with an increased probability of a rate increase. Market pricing, however, reflects more modest expectations: investors expect just a single quarter-point increase by year-end.
Jefferies' chief economist Thomas Simons underscored the difficulty of reaching consensus within the Fed. "There are 19 Fed policymakers, and it wouldn’t be a stretch to say that they have 19 different views on the balance of risks regarding the conflict in Iran, the impact on the outlook for growth and inflation, and the appropriate policy response," he wrote. Simons added that, given the high degree of uncertainty, "solid labor market fundamentals and a lack of bleed-through of high energy prices to core inflation gives the FOMC breathing room to maintain their wait-and-see approach."
Beyond formal forecasts, the debate highlights competing narratives about the economy. One camp sees weakening real incomes and anchored inflation expectations as signals that consumers will pull back and that easing is appropriate. Another views the combination of still-elevated inflation, strong investment flows - notably into AI-related technologies - and a re-accelerating jobs market as reasons to keep policy restrictive or even tighten further.
For markets and sectors, the policy path matters materially. An outcome favoring cuts could ease borrowing costs broadly, affecting interest-rate-sensitive sectors such as housing and parts of consumer finance. Conversely, a trajectory toward higher rates would increase funding costs and could restrain highly leveraged businesses while potentially cooling equity valuations for growth-oriented sectors. Energy markets themselves face near-term volatility tied to geopolitical developments and the reopening of key shipping lanes.
With views split and a new Fed chair offering his first public guidance, investors and policymakers alike are braced for a period in which small shifts in data or geopolitics could swing expectations markedly. The range of professional forecasts underscores the extent to which the balance of risks remains finely poised.
Summary
Economists are divided over the Federal Reserve's likely path as oil price swings, strong investment especially in AI, and ongoing consumer spending create conflicting signals. Some anticipate near-term rate cuts as real wages fall and inflation expectations stay contained; others expect further rate hikes as growth, inflation and labor markets show strength. The Fed under new Chair Kevin Warsh is expected to hold rates at 3.50%-3.75% at his first meeting, while fresh projections and his press conference will be scrutinized for clues on future policy.
Key points
- Economists at Natixis and Citi expect near-term rate cuts - Natixis projects two quarter-point cuts and Citi expects sequential cuts in September, October and December.
- PGIM's chief economist forecasts three rate hikes, citing above-trend growth, above-target inflation and a warming labor market.
- Fresh Fed projections and Chair Kevin Warsh's first press conference are central near-term events; investors currently price in a single quarter-point hike by year-end.
Risks and uncertainties
- Geopolitical developments affecting oil - the reopening of the Strait of Hormuz followed by a sharp fall from prior spikes creates volatility for energy markets and inflation.
- Policy uncertainty around import taxes - an unsettled tariff regime under court challenge could alter trade dynamics and inflationary pressures.
- Internal Fed disagreement - diverse views across 19 policymakers make it harder for the Fed to present a unified forward guidance, increasing policy path uncertainty for markets.