The Federal Reserve will likely keep interest rates unchanged throughout this year, according to a new survey of economists who have shifted their previous expectations for rate cuts into next year amid hopes that current inflation pressures will prove temporary.
The survey conducted by Reuters shows fewer than half of economists now anticipate the federal funds rate will drop this year from its current 3.50%-3.75% range where it has remained since December. This represents a significant shift from last month when more than two-thirds of economists predicted at least one reduction.
Economic forecasters have delayed their expectations for rate relief while continuing to believe that energy-related price increases stemming from the conflict in Iran that began 2-1/2 months ago will remain temporary and won’t spread to other consumer goods.
Financial markets tell a different story, with interest rate futures now suggesting a possible 25-basis-point increase by the end of January. Meanwhile, the 10-year Treasury note yield has climbed to its highest level in more than a year, surpassing 4.6%.
The May 14-19 survey of 101 economists found that nearly 85% – or 83 respondents – expect the key rate to stay within the 3.50%-3.75% range through the third quarter. This compares to just over half who held this view last month and nearly 70% in March who had anticipated at least one cut by this time.
“Both hikes and cuts are feasible…the base case is a hold, and it’s a close call between the other two options, to be honest. It feels like if they are going to have their next move as a cut, it’s more likely to be next year than this year,” said Aditya Bhave, head of U.S. economics at Bank of America.
“There are certainly risks of higher inflation…we are not geopolitical experts or commodities forecasters. There’s a lot of uncertainty around our forecast for sure.”
During the Federal Reserve’s April meeting, three policymakers voted against maintaining language suggesting potential rate cuts in the policy statement, while one member supported an immediate reduction. Since that meeting, Fed officials have advocated for maintaining current policy, pointing to uncertainty from the continuing U.S. conflict with Iran.
Regardless of the approach taken, economists believe incoming Fed Chair Kevin Warsh is unlikely to provide the rate reductions that President Donald Trump is requesting.
No clear agreement emerged on where rates will finish the year, though nearly half of the 101 economists – 49 respondents – predicted no changes this year, an increase from approximately one-third previously. About one-third expect a single cut this year, primarily in December. Four economists anticipate at least one rate increase.
Despite upward revisions to inflation projections, most economists continue to view current price pressures as temporary.
Inflation currently exceeds the Fed’s 2% goal by more than one percentage point and has remained above target for over five years.
The Personal Consumption Expenditures Price Index, which the Fed uses as its primary inflation measure, was most recently reported at 3.5% annually – the highest reading since May 2023.
Economists now project this measure will reach 3.9%, 3.7% and 3.4% year-over-year in the second, third and fourth quarters respectively. These forecasts are roughly 25 basis points higher than last month’s predictions and represent the third consecutive upward adjustment.
Among a smaller group surveyed, nearly 86% characterized current inflation pressures as temporary, though opinions were divided on whether this assessment might change.
“Our track record as economists hasn’t been great on inflation lately. There is a big risk we’re in this new kind of era where you’re going to see more frequent shocks,” said Scott Anderson, chief U.S. economist at BMO Capital Markets.
Predictions for unemployment and economic growth remained largely stable.
Unemployment is expected to average 4.3% or slightly higher in coming years, close to current levels, while economic growth is projected to average approximately 2%.
