Summary
Economists in a recent poll expect the Federal Reserve to maintain its policy rate at the current 3.50%-3.75% range until September, holding to at least one cut later this year. That view contrasts with financial market pricing, which has mostly excluded any cut in 2024 and even placed nearly a 30% likelihood on a rate increase after a spike in crude oil following escalation in the U.S.-Israel war with Iran.
Polling results and market divergence
In a survey conducted March 20-25, 61 of 82 economists - nearly three-quarters - said they expect the Fed to keep rates unchanged through the next quarter. That marked a shift from a poll two weeks earlier, when around two-thirds had anticipated a cut to a 3.25%-3.50% range by the end of June.
More broadly, 55 of 82 respondents - just over two-thirds - do not foresee any reductions in the policy rate until at least September. Financial markets, by contrast, have mostly priced out the prospect of a cut this year and, in the wake of heightened geopolitical tensions and a jump in energy prices, have assigned nearly a 30% chance to a rate increase.
Geopolitical shock lifts oil and complicates inflation path
Analysts pointed to the war in the Middle East - specifically the U.S.-Israel conflict with Iran now in its fourth week - as the immediate driver behind a surge in crude oil, which has risen by more than 40% since hostilities intensified. Economists acknowledged the spike will feed through to headline inflation, which was running about a full percentage point above the Fed’s 2% objective before the war began.
At the same time, the U.S. two-year Treasury yield has climbed by over 55 basis points. Despite those moves, many economists said they expect any inflationary spillovers from the energy shock to be more constrained and shorter-lived than the market reaction suggests.
Fed posture and official guidance
The Fed held its policy rate at 3.50%-3.75% last week. A number of officials signalled that elevated inflation risks remain the central concern for policy, implying that the probability of an early cut is low.
Economists remain divided on the total number of cuts that will occur by the end of 2026. Responses clustered around one reduction (28 respondents) and two reductions (37 respondents). Thirteen economists anticipated no cuts this year, while four expected three reductions by the end of 2026.
Forecasters extend timelines
Among the 75 economists who answered both the latest survey and the one conducted prior to the March 17-18 policy meeting, 34 - a substantial 45% minority - pushed their expectations for a rate cut further into the future. Just over half of those respondents left their previous forecasts unchanged.
Jonathan Millar, senior U.S. economist at Barclays, explained the reasoning behind the delayed timing: "It’s going to take longer for the Fed to gain confidence inflation is returning to a trajectory that’s consistent with its 2% target. We don’t think that’s going to happen until September." He added: "It’s entirely plausible the Fed waits out the oil price for longer and delays cuts into next year."
Millar also argued that this is not necessarily an instance where markets are leading policy: "I don’t think this is a case where financial markets actually lead the Fed," he said, noting that financial conditions have already tightened without any move in the funds rate.
Political context and leadership considerations
U.S. President Donald Trump, who has nominated Kevin Warsh as the next Fed chair, has publicly criticised current Chair Jerome Powell for not pursuing faster rate cuts. Jan Groen, chief U.S. economist at Societe Generale, cautioned that any incoming chair pushing for rapid, numerous cuts could struggle to build consensus this year: "Any chair that comes in and demands a large number of cuts is going to have a hard time finding consensus on that at least for this year," he said. Groen added that developments tied to the Iran war and oil markets are contributing to inflation concerns.
Inflation forecasts rise
Economists have recently increased their inflation projections, mainly on headline measures. The Personal Consumption Expenditures (PCE) index - the Fed’s preferred inflation gauge - is now expected to rise at an annual rate of 3.3% in the second quarter, 3.1% in the third quarter, and 2.9% in the fourth quarter. Those projections are roughly 50 basis points higher than forecasts made two weeks earlier and are above the Fed’s own latest projections.
What this means for markets and policy
The combined effect of elevated oil prices, heightened geopolitical risk, and stronger near-term inflation projections has led most forecasters to defer expectations for easing monetary policy. While markets have reacted by leaning away from cuts and even pricing in some upside risk, economists surveyed continue to leave room for a September reduction, although some see the possibility of cuts stretching further into next year.
Note: This article reflects the results and commentary from the described poll and interviews. It reports the views and projections provided by the surveyed economists and cited individuals without adding external data or analysis.