Economists surveyed by Reuters expect the U.S. Federal Reserve to implement its first interest rate cut of the year in June, maintaining that outlook despite concerns that disruptions in global energy markets from the U.S.-Israeli war with Iran could further fuel already high inflation.
A roughly 40% jump in global oil prices has pushed the yield on the rate-sensitive two-year Treasury note up by nearly 30 basis points. At the same time, interest rate futures markets have shifted expectations for the first rate cut to September and have largely ruled out the possibility of a second reduction this year.
Inflation was already running well above the Fed’s 2% target before the conflict began at the end of February. Meanwhile, nonfarm payrolls unexpectedly fell by 92,000 last month. Still, all 96 economists surveyed between March 6 and March 12 expect the Fed to keep interest rates unchanged at 3.50%–3.75% during its March 18 meeting.
That marks a stronger consensus than last month’s survey, when slightly under three-quarters of economists predicted rates would remain on hold.
About two-thirds of economists — 63 out of 96 — believe the Fed will reduce rates to a range of 3.25%–3.50% next quarter, most likely in June. The anticipated timing would come shortly after Federal Reserve Chair Jerome Powell’s term concludes in May.
U.S. President Donald Trump, who has nominated Kevin Warsh to succeed Powell as Fed chair, has repeatedly criticized Powell for not cutting interest rates more quickly.
“It’s clear enough what Warsh has convinced the president he’s going to try to do, and we have to factor that into our forecasts…But then it’s a question of whether the committee dynamic and the data allow him to execute on that or not,” said Jeremy Schwartz, a senior U.S. economist at Nomura.
“He can probably get one or two cuts this year.”
“The conflict with Iran is boosting global energy prices. That’s going to lead to some headline inflation, but potentially also some pass-through into some core inflation components. Meanwhile, the underlying trend in the labor market is not strong, but it doesn’t seem to be deteriorating either and that’s a situation where the Fed isn’t really forced into a kind of more reactive posture.”
Economists remain divided on where interest rates will end the year. However, the median forecast from the poll indicates two rate cuts before the November mid-term elections.
Nearly 40% of economists believe there will be only one rate reduction — or none at all — this year, almost twice the proportion predicting three or more cuts.
The Personal Consumption Expenditures (PCE) index, the Fed’s preferred measure of inflation, is expected to average 2.8% during the first half of this year and 2.7% in 2026. Both figures represent a slight increase compared with last month’s projections.
“Inflation has not been at the 2% objective in five years. If anything, inflation is set to move higher in the near term…Right now the inflation risk is greater than the labor market risk,” said Gus Faucher, chief economist at PNC Financial Services Group.
The unemployment rate, currently at 4.4%, is expected to remain stable throughout the year.
When asked an additional question in the survey, nearly 80% of economists — 29 out of 37 respondents — said it was more likely the Federal Reserve would keep rates elevated for longer than expected rather than move to cut them sooner.
“We are just recovering from the supply shock caused by the tariffs and now we have another in the form of the war with Iran. Under Powell, that means they’re just sitting on their hands and waiting for data to come in,” said Philip Marey, senior U.S. strategist at Rabobank.
“The risk to our outlook is more towards fewer and possibly later cuts…but Trump would really like the cuts before the mid-terms rather than after.”
Strong economic growth expectations also reduce the need for additional policy support. The U.S. economy is forecast to expand between 2.1% and 2.5% per quarter this year — faster than the previous quarter’s 1.4% growth and above the Federal Reserve’s estimated non-inflationary growth rate of 1.8%.
