Fed Expected to Hold Rates Steady Amid Inflation Concerns

The U.S. Federal Reserve is widely expected to keep interest rates steady at its upcoming June meeting, with most economists polled by Reuters pushing back previous predictions for rate cuts until next year [1]. This shift comes as forecasters view a recent energy-driven inflation spike as temporary but acknowledge ongoing uncertainty [1].

Key takeaways

• Most economists polled by Reuters expect the Federal Reserve to hold the federal funds rate steady at 3.50%-3.75% through the third quarter [1].
• Less than half of economists now anticipate a rate cut this year, a significant change from over two-thirds who expected one last month [1].
• JPMorgan Funds' David Kelly believes the recent inflation surge is largely transitory, suggesting underlying forces for low inflation remain [2].
• Some economists, like those at abrdn, foresee a recession beginning in the third quarter, potentially leading to rate cuts by 2025 [2].

Shifting Expectations for Rate Cuts

A near-85% majority of economists surveyed by Reuters from May 14-19, 83 out of 101, predicted the key rate would remain in the 3.50%-3.75% range through the third quarter [1]. This marks a notable change from March, when nearly 70% had expected at least one cut by then [1]. Aditya Bhave, head of U.S. economics at Bank of America, stated that while both hikes and cuts are feasible, a hold is the base case, with cuts more likely next year [1].

The Federal Reserve's preferred inflation gauge, the Personal Consumption Expenditures Price Index, was last reported rising 3.5% annually, the highest since May 2023, and is projected to rise further in the near term [1]. Despite this, nearly 86% of a smaller sample of economists believe current inflation pressures are transitory [1]. David Kelly, chief global strategist at JPMorgan Funds, suggests that while the inflation surge changed the Fed's focus, most of it "is, (or rather was), transitory," and pre-pandemic inflation levels could return once these temporary factors subside [2].

Economic Outlook and Potential Risks

Some economists anticipate further rate hikes before a pause. Subadra Rajappa, head of U.S. rates strategy at Societe Generale, and Ryan Swift, U.S. bond strategist at BCA Research, both foresee one more 25-basis-point hike followed by a hold for the rest of the year [2]. Scott Wren, senior global market strategist at Wells Fargo Investment Institute, expects 25-basis-point increases at both the May and June FOMC meetings, ruling out rate cuts in the current year [2]. Wren also suggests that the economy will slow further and potentially enter a recession later this year if the Fed does not ease rates until its inflation target is clearly met [2].

Conversely, economists at abrdn expect the federal funds rate to drop to zero by 2025, citing historical patterns of rate cuts following recessions [2]. They project a recession to begin in the third quarter, which could lead to a 2% reduction in U.S. , an increase in unemployment to 6%, and a decrease in core PCE inflation to 1% [2]. Gautam Khanna, head of U.S. Multi Sector Fixed Income at Insight Investment, sees risks "heavily skewed to the downside" for the economy, though he anticipates a relatively shallow recession if one occurs [2].