NextFin News - The Federal Reserve is poised to maintain U.S. interest rates at their current levels until at least September, according to a Reuters poll of 82 economists released on Thursday. This collective stance represents a direct challenge to financial markets, which have recently begun pricing in a 30% probability of a rate hike as the conflict between Israel and Iran enters its fourth week. While traders are reacting to a 40% surge in crude oil prices, the academic and professional forecasting community remains convinced that the central bank will look through this energy shock, provided it remains relatively short-lived.
The Federal Open Market Committee (FOMC) held the federal funds rate steady in the 3.50%-3.75% range last week, a decision that now looks like a long-term anchor for U.S. monetary policy. Nearly three-quarters of surveyed economists, or 61 out of 82, expect no movement in the second quarter of 2026. This marks a significant hawkish shift from just two weeks ago, when two-thirds of the same group anticipated a cut by June. The primary driver for this recalibration is a spike in inflation expectations; the Personal Consumption Expenditures (PCE) index is now projected to hit 3.3% in the second quarter, a full 50 basis points higher than previous estimates.
The divergence between Wall Street and the ivory tower hinges on the interpretation of "financial tightening." Jonathan Millar, senior U.S. economist at Barclays, argues that the Fed does not need to raise rates further because the market has already done the work for them. The U.S. 2-year Treasury note yield has climbed over 55 basis points since the outbreak of hostilities in the Middle East, effectively raising borrowing costs without a formal vote in Washington. This "passive tightening" allows the Fed to remain in a holding pattern, waiting for the geopolitical dust to settle before committing to a policy pivot.
Political pressure is also mounting as U.S. President Trump continues to criticize Chair Jerome Powell for maintaining a restrictive stance. The tension is further complicated by the pending transition at the top of the central bank, with U.S. President Trump having nominated Kevin Warsh to succeed Powell. However, analysts like Jan Groen at Societe Generale suggest that even a more dovish chair would struggle to find a consensus for cuts this year given the inflationary backdrop of a regional war. The institutional inertia of the Fed, combined with a headline inflation rate running a full percentage point above the 2% target, creates a high bar for any immediate easing.
The survey results show a fractured outlook for the tail end of 2026. While a majority still expects at least one or two cuts before year-end, a growing minority of 13 economists now forecasts no change for the entire calendar year. This "higher for longer" reality is a bitter pill for a market that, until recently, was intoxicated by the prospect of a rapid return to low-interest environments. The Fed's own "dot plot" projections currently signal a single reduction, but that forecast remains hostage to the volatility of global energy markets and the duration of the Iran-Israel conflict.
Ultimately, the Fed finds itself in a defensive crouch. Governor Lisa Cook noted on Thursday that the balance of risks has shifted decisively toward inflation, describing the labor market as being in a state of "precarious balance." By choosing to wait until September, the Fed is betting that the current inflationary spike is a temporary byproduct of war rather than a structural shift. If that bet fails, the 30% chance of a hike currently priced in by the markets may soon become the baseline expectation for the summer.
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