Economists push back Fed rate cut bets amid rising energy prices

The US Federal Reserve is likely to wait at least six months before cutting interest rates this year, as inflation pressures persist, according to a Reuters poll of economists.

The delay comes amid rising energy prices triggered by the ongoing conflict in the Middle East.

The war, now nearing two months, has led to a sharp increase in fuel costs.

This has weakened consumer confidence and disrupted earlier expectations of monetary easing.

Economists noted that inflation remains elevated.

Even policymakers who favour looser policy have acknowledged that price pressures are still uncomfortably high.

This has reduced urgency for the Fed to begin cutting rates.

Shift in rate cut expectations

The latest Reuters poll, conducted between April 17 and 21, shows a clear shift in expectations.

A narrow majority of economists now believe interest rates will remain unchanged in the coming months.

A total of 56 out of 103 economists expect the Fed’s benchmark interest rate to stay within the 3.50%–3.75% range by the end of September.

This marks a change from late March, when nearly 70% of respondents expected at least one rate cut by that time.

Earlier in March, most economists had anticipated a rate reduction by June.

Despite the delay, most forecasters still expect at least one rate cut later in the year.

71 economists predicted at least one reduction before year-end.

However, nearly one-third now believe rates may remain unchanged throughout 2026, a significant increase from the previous survey.

Inflation outlook revised higher

Inflation expectations have also been revised upward.

The Fed’s preferred measure the Personal Consumption Expenditures Price Index, is now expected to rise at an annual rate of 3.7% in the second quarter, 3.4% in the third, and 3.2% in the fourth quarter.

These projections are about 30 basis points higher than estimates from late March.

However, they remain below consumer expectations, which are close to 5% for the coming year.

Brett Ryan, senior US economist at Deutsche Bank, warned about the risks of persistent inflation.

“With the backdrop to inflation missing their target for the better part of five years, they really need to be careful of inflation expectations becoming unanchored,” he said, as quoted in a Reuters report.

Fed leadership and policy outlook

The poll was conducted largely before Kevin Warsh’s confirmation hearing for the role of Fed chair.

However, economists contacted after his testimony said their views remained unchanged.

As cited in a Reuters report, Michael Gapen, chief US economist at Morgan Stanley, said, “We have a favorable outlook broadly similar to the Fed's, where tariff inflation is transitory, and oil puts upward pressure on headline inflation but doesn't translate into faster core inflation. Therefore, the Fed will be able to ease rates later this year.”

Warsh, nominated by US President Donald Trump, denied promising rate cuts during his testimony.

However, he called for “regime change” at the Fed.

Economists remain cautious about the impact of leadership changes.

While inflation expectations have risen, forecasts for economic growth and unemployment remain largely unchanged.