By Indradip Ghosh
BENGALURU, May 19 (Reuters) – The U.S. Federal Reserve will avoid cutting interest rates this year, according to most economists polled by Reuters who largely pushed long-held calls for reductions into next year on hopes the current inflation flare-up is temporary.
Less than half of economists see the federal funds rate, which has held in a range of 3.50%-3.75% since December, falling this year – a dramatic change from just over two-thirds who expected at least one cut last month.
But forecasters more broadly have pushed a still-benign rate outlook further into the future, continuing to view an energy-driven inflation spike since the start of the war in Iran 2-1/2 months ago as transitory and unlikely to spread more broadly into other consumer prices.
Interest rate futures markets, by contrast, are now narrowly pricing in a 25-basis-point hike by end-January, while the benchmark 10-year Treasury note yield has soared to the highest in over a year, above 4.6%.
A near-85% majority of economists polled May 14-19 by Reuters, 83 of 101, predicted the key rate would remain steady in the 3.50%-3.75% range through the third quarter, compared to just over half last month and a near-70% majority in March who had expected at least one cut by then.
“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.”
At the Federal Reserve’s April meeting, three policymakers dissented in favour of dropping a bias to cut rates from the policy statement while one voted for an immediate cut. Since then, Fed officials have argued for staying put, citing uncertainty tied to the ongoing U.S. war on Iran.
Either way, economists say incoming Fed Chair Kevin Warsh is unlikely to deliver the cuts President Donald Trump is seeking.
There was no clear consensus where rates would end the year, but a near-50% minority – 49 of 101 – predicted no move this year, up from about a third previously. Nearly a third expected one cut this year, mostly in December. Four economists saw at least one hike.
INFLATION FORECASTS REVISED UP, BUT STILL SEEN AS TRANSITORY
Inflation is more than one percentage point higher than the Fed’s 2% target and has been above it for more than half a decade.
The Fed’s preferred gauge, the Personal Consumption Expenditures Price Index, was last reported rising 3.5% on an annual basis, the highest since May 2023.
It is now seen rising to 3.9%, 3.7% and 3.4% year-on-year in the second, third and fourth quarters, respectively, about 25 basis points higher than last month’s forecasts and marking a third straight upward revision.
Nearly 86% of a smaller sample said current inflation pressures were transitory, though they were split on whether that could 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.
Forecasts for unemployment and growth were broadly unchanged.
Joblessness was seen averaging 4.3% or slightly higher in coming years, around where it is now, while growth was expected to average about 2%.
(Other stories from the Reuters global economic poll)
(Reporting by Indradip Ghosh; Polling by Jaiganesh Mahesh and Anant Chandak; Editing by Ross Finley and Chizu Nomiyama )
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