Economists Anticipate June Fed Rate Cut Despite Inflation Risks from Iran Conflict

A Reuters survey of economists indicates that the Federal Reserve is expected to initiate its first interest rate cut of the year in June. Respondents maintained this forecast despite the potential for the U.S.-Israel conflict with Iran to disrupt energy markets and drive up already elevated inflation.

Global oil prices have risen approximately 40%, pushing yields on the more interest-rate-sensitive two-year U.S. Treasury notes up by nearly 30 basis points. Market expectations embedded in interest rate futures have shifted, now pointing to the first cut occurring in September, with the likelihood of a second cut this year largely priced out.

Before the conflict escalated in late February, inflation was already significantly above the Fed's 2% target. Coupled with an unexpected loss of 92,000 non-farm payroll jobs in February, a survey conducted from March 6-12 showed that all 96 economists polled expect the Fed to hold its benchmark rate steady in the 3.50%-3.75% range at its March 18 meeting. This consensus was slightly stronger than in the previous month's survey, where just under three-quarters of respondents held this view.

Approximately two-thirds of the economists (63 out of 96) forecast that the Fed will lower the target rate range to 3.25%-3.50% next quarter, with June being the most probable timing—following the conclusion of Chair Powell's term in May. The U.S. President has nominated Wash to succeed Powell as Fed Chair and has repeatedly criticized Powell for being too slow to cut rates.

Jeremy Schwartz, Senior U.S. Economist at Nomura, commented, "It's clear that Wash has convinced the President of what he will attempt to do, and we must factor that into our forecasts... However, the question is whether the dynamics within the committee and the incoming data will permit him to follow through. He might be able to engineer one or two rate cuts this year."

"The Iran conflict is boosting global energy prices. This will impact headline inflation to some degree and could also feed into core inflation components. Meanwhile, while labor market fundamentals are not robust, they are not deteriorating. This situation allows the Fed to avoid adopting a more reactive policy stance."

There was no clear consensus on the year-end level of the federal funds rate. However, the median response from the survey suggests two rate cuts will occur before the mid-term elections in November. Nearly 40% of respondents expect just one rate cut or none at all this year, a proportion almost double those forecasting three or more cuts.

The survey median indicates that the Fed's preferred inflation gauge, the Personal Consumption Expenditures (PCE) price index, is expected to average 2.8% in the first half of this year and 2.7% for the full year 2026, slightly higher than last month's projections.

Gus Faucher, Chief Economist at PNC Financial Services Group Inc, stated, "Inflation has not hit the 2% target for five years. In the short term, inflation might actually climb higher... The risks from inflation currently outweigh the risks from the labor market."

With the U.S. unemployment rate at 4.4%, respondents expect it to remain stable this year. In response to an additional question, nearly 80% of the 37 economists (29 individuals) believe the Fed is more likely to keep rates higher for longer than currently expected, rather than cutting rates more quickly.

Stronger economic growth prospects are also reducing the perceived need for immediate policy support. Respondents project the U.S. economy will expand at a quarterly rate between 2.1% and 2.5% this year, faster than the 1.4% growth recorded last quarter and above the 1.8% rate the Fed considers non-inflationary.