WASHINGTON — As the Federal Reserve prepares to announce its latest interest rate decision, economists who help manage billions of dollars in investments are finding themselves on opposite ends of the spectrum when it comes to what the central bank should do next.
The core question dividing the financial community: Will American consumers start pulling back in the second half of 2026 and drag the economy down with them — or will stubborn inflation and a strengthening job market force the Fed to raise rates to cool things off, much like what happened during the COVID-19 pandemic era?
Chris Hodge, the top U.S. economist at Natixis CIB Americas, believes the Fed’s next move will be a rate cut. “The next move will be lower. (Inflation) expectations are anchored, real wage gains are negative,” he said, pointing to consumer weakness and declining inflation-adjusted wages as reasons for two quarter-point cuts in the coming months. He added, “Are they going to want to hike in an environment when inflation is driven by supply considerations?”
That view gets additional support from economists at Citi, who are forecasting an even more aggressive series of rate reductions — sequential cuts at the Fed’s September, October, and December meetings.
Part of the backdrop for that outlook involves oil prices. Since the U.S. and Iran reached a deal to reopen the Strait of Hormuz, global oil prices have dropped sharply to below $80 a barrel. That’s only about 10% higher than where prices stood before U.S.-backed military action caused Iran to close the crucial waterway — erasing most of the 70%-plus price spike that occurred during the conflict.
Taking the opposing view, Robert Sockin, Chief Economist at PGIM, believes the Fed will need to raise rates three times. He describes an economy that “continues to power along with above-trend growth, above-target inflation, and now a warming labor market” that, after a slow start to the year, is now adding jobs at a pace resembling the pre-pandemic years.
The wide range of professional opinion reflects just how many moving parts are in play right now. Ongoing uncertainty surrounds U.S. import tariffs, which remain under legal challenge even as President Donald Trump pursues new avenues to enforce them. Meanwhile, a massive wave of investment in artificial intelligence is creating tension with the declining share of economic growth going to workers.
Wednesday’s announcement will mark the conclusion of the first Fed meeting chaired by new Chairman Kevin Warsh. Rates are broadly expected to stay within the current range of 3.50% to 3.75%, but attention will be focused on a fresh set of economic projections and Warsh’s debut press conference for any hints about whether the Fed sees lower inflation ahead or the need for higher borrowing costs. Investors currently anticipate just one quarter-point rate increase before year’s end.
Thomas Simons, chief economist at Jefferies, captured the uncertainty well. “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. He added that “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.”
With so much uncertainty in the air, the new Fed chairman may have every reason to keep his cards close to his chest at his first press conference.
