Economic experts now believe the Federal Reserve will postpone reducing interest rates for at least half a year, based on findings from a recent economist survey, as ongoing Middle Eastern conflicts drive up energy costs and reignite inflation concerns.
The conflict in the Middle East, now approaching its second month, has caused fuel costs to surge, pushing consumer confidence to historic lows and eliminating market expectations for rate reductions.
Federal Reserve officials, including those typically favoring lower rates, are now expressing concern that inflation levels remain troublingly high, indicating no immediate pressure to adjust monetary policy. Economic forecasters have once again pushed back their predictions for rate cuts in their most recent survey.
However, the majority of analysts continue to believe rates will decrease at least once more. Their inflation projections remain significantly more conservative than those of consumers, who have observed steeper price increases since the conflict began, especially in gasoline and energy sectors.
In the Reuters survey conducted April 17-21, a narrow majority of 56 out of 103 economists forecast that the Fed’s key interest rate will stay within the 3.50%-3.75% range through September’s end. This contrasts sharply with the nearly 70% who anticipated at least one reduction by that time in late March polling. Earlier March surveys showed most expected cuts by June’s conclusion.
While economists lacked clear agreement on year-end rate levels, 71 still predicted at least one reduction. The median projection anticipates a single cut, aligning with the Federal Reserve’s dot-plot projections from last month.
Almost one-third of surveyed economists now anticipate rates will remain static throughout the year, nearly twice the proportion from the previous survey.
The polling occurred mainly before Fed chair nominee Kevin Warsh’s Senate committee confirmation hearing on Tuesday, though economists contacted afterward indicated his testimony didn’t change their forecasts.
“We maintain a positive outlook broadly aligned with the Fed’s perspective, where tariff-related inflation proves temporary and oil creates upward pressure on overall inflation without accelerating core inflation rates. This should allow the Fed to reduce rates later this year,” explained Michael Gapen, Morgan Stanley’s chief U.S. economist.
“The primary threat to our assessment is if certain inflation components don’t perform as favorably as anticipated, causing the Fed to maintain current positions,” he added.
President Donald Trump has voiced confidence that Warsh, his choice to replace Fed Chair Jerome Powell, would implement rate cuts if confirmed, stating disappointment would follow if this didn’t occur.
During Tuesday’s testimony, Warsh rejected claims of making such commitments to Trump while advocating for “regime change” within the Fed.
“Warsh represents just one perspective and would need to persuade the policy-setting committee if he arrived intending rapid cuts. He’ll require time to establish credibility and committee trust,” noted Brett Ryan, Deutsche Bank’s senior U.S. economist.
Vanguard economist Adam Schickling shared similar views.
“Replacing a single Fed member isn’t sufficient to alter our policy expectations,” he stated.
The Fed’s preferred inflation measure, the Personal Consumption Expenditures Price Index, is projected to increase at annual rates of 3.7%, 3.4%, and 3.2% during the second, third, and fourth quarters respectively, representing approximately 30 basis points above late March predictions. The Federal Reserve targets 2% inflation.
These survey adjustments represent the second consecutive upward revision, though they remain moderate compared to consumer expectations of nearly 5% inflation over the coming year.
“Given inflation has missed their target for most of the past five years, they must carefully prevent inflation expectations from becoming unanchored,” Deutsche Bank’s Ryan observed.
Unemployment and growth projections remained largely stable. Joblessness was expected to average 4.3% in upcoming years, close to current levels, while growth was projected to average approximately 2%.
