Reuters poll: Economists see Fed holding rates to September before cautious rate cuts
- A majority of economists surveyed by Reuters expect the Fed to keep rates unchanged through September.
- Inflation expectations measured by the PCE index have been revised higher for the coming quarters.
- Despite this short-term caution, most economists still expect at least one rate cut this year.
The latest Reuters surveys of economists suggest a notable shift in expectations regarding the trajectory of US monetary policy, with the timing of potential easing likely to come later than previously anticipated.
According to the poll, 56 of the 103 economists surveyed expect the Federal Reserve (Fed) to keep its policy rate within the current 3.5%-3.75% range at least through September. This represents a clear shift from a similar survey conducted in late March, when a majority of economists expected at least one rate cut by that time.
At the same time, inflation forecasts have been revised higher. Economists now expect the Personal Consumption Expenditures (PCE) Price Index, the Fed’s preferred gauge of inflation, to average 3.7% in the second quarter, 3.4% in the third quarter and 3.2% in the fourth quarter. These projections are above those from the previous March poll, which stood at 3.3%, 3.1% and 2.9%, respectively.
Despite the upward revisions to inflation and expectations of a prolonged policy hold in the near term, the consensus still points to monetary easing later in the year. A total of 71 out of 103 economists believe the Fed will deliver at least one rate cut before the end of the year, suggesting that the anticipated gradual slowdown in inflation could eventually allow the central bank to ease monetary conditions.
These results highlight the delicate balance faced by the Fed, caught between inflation that remains above target and signs that price pressures could gradually moderate over the coming quarters.
Fed FAQs
Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.
The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions. The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.
In extreme situations, the Federal Reserve may resort to a policy named Quantitative Easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.
Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.
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