Key Points:
- The U.S. Federal Reserve will likely execute its first interest rate cut in June.
- Economists expect the central bank to hold rates steady at its March meeting.
- Surging oil prices from the Middle East war threaten to push inflation higher.
- President Trump expects his new Fed chair nominee to lower borrowing costs quickly.
Financial experts still expect the United States Federal Reserve to cut interest rates in June. They hold firmly to this prediction even as a massive geopolitical crisis unfolds. The ongoing war between the United States, Israel, and Iran recently sent global oil prices skyrocketing by nearly forty percent. This sudden energy shock threatens to push already high consumer prices even higher. Despite these major risks, economists believe the central bank will stick to its current timeline.
The Federal Reserve holds its next policy meeting on March 18. A recent Reuters poll surveyed 96 economists about their expectations for this highly anticipated event. Every single expert predicted the central bank would keep the benchmark interest rate exactly where it sits today, resting between 3.50 percent and 3.75 percent. Just a month ago, only three-quarters of these forecasters felt certain the Fed would hold the line. However, an unexpected drop of 92,000 jobs last month quickly changed the consensus.
Looking ahead to the summer, roughly two-thirds of the polled experts expect the central bank to finally lower borrowing costs. They predict the Fed will drop rates to a range of 3.25 percent to 3.50 percent in June. The timing of this move matters immensely. Current Federal Reserve Chair Jerome Powell officially ends his term in May.
President Donald Trump frequently attacks Powell for refusing to cut rates faster. To change the direction of the central bank, Trump nominated Kevin Warsh as the next chairman. The president fully expects Warsh to slash borrowing costs aggressively to keep the economy running hot ahead of the November midterm elections.
Jeremy Schwartz, a senior economist at Nomura, highlighted the tricky situation the new chairman will face. Schwartz pointed out that Warsh clearly convinced the president that he would lower rates. Forecasters must factor those political promises into their economic models. However, Schwartz noted that the actual economic data will ultimately dictate what the committee can do. He suspects the Fed can safely manage only one or two cuts this entire year.
The war in the Middle East complicates the entire economic picture. The massive spike in global oil prices has already pushed the rate-sensitive two-year Treasury note yield up by nearly 30 basis points. Investors watch these bond yields closely because they often signal future borrowing costs for mortgages and credit cards. When the bond market reacts this violently, it tells policymakers to tread carefully.
Forecasters remain divided on where interest rates will settle by the end of the year. The median poll results suggest the central bank will cut rates twice before voters head to the polls in November. However, a growing group of experts feels more cautious. Nearly forty percent of the economists believe the Fed will cut rates only once, or perhaps not at all.
Inflation continues to frustrate policymakers. The central bank prefers to track rising prices using the Personal Consumption Expenditures index. Experts expect this gauge to average 2.8 percent in the first half of the year. Gus Faucher, the chief economist at PNC Financial Services Group, emphasized that inflation has missed the central bank’s two percent goal for five long years. He warned that inflation currently presents a much bigger risk to the country than the labor market does.
Beyond inflation, the overall economy continues to show impressive resilience. Forecasters expect the economy to expand by up to 2.5 percent each quarter this year. The national unemployment rate also sits steady at 4.4 percent. Strong growth argues against the need for the central bank to provide extra financial support. Philip Marey, a strategist at Rabobank, noted that the economy just survived a supply shock from tariffs, and now it faces a new shock from the war. Marey expects the Fed to simply sit on its hands and wait for clearer data.
