Fed to keep rates on hold at least until September as inflation risks linger

New Straits Times

a day ago

BENGALURU: The US Federal Reserve will keep interest rates on hold for at least another couple of months, according to most economists polled by Reuters, as risks linger that inflation may resurge due to President Donald Trump's tariff policies.
With most trade negotiations incomplete as the July 9 deadline for a 90-day pause on tariffs announced in April approaches, forecasters have been reluctant to change their already fragile economic outlook.
Rising concerns about US debt and a deluge of bond issuance fuelled by a sweeping tax cut bill passed by the House of Representatives, but not the Senate, are not helping. Data on Friday showed no signs of significant stress building in the labor market, suggesting the Fed is in no hurry to cut interest rates any time soon.
All but two of the 105 economists in the June 5-10 Reuters poll predicted the Federal Open Market Committee would keep the fed funds rate unchanged at its June 17-18 meeting in a 4.25-4.50 per cent range, where it has been since the start of the year. Around 55 per cent of economists - 59 of 105 - said the Fed would resume cutting next quarter, most likely in September and in line with interest rate futures pricing. That outlook has not changed from last month.
"As long as the labor market looks fine, we expect the FOMC to continue to stay on hold, and use rhetoric to bolster their inflation-fighting credibility. Until there is a cost, why signal otherwise?" said Jonathan Pingle, chief US economist at UBS.
"At the moment 'grey area' seems more 'charcoal'... the Committee is facing a substantial amount of uncertainty."
Inflation expectations have remained elevated on predictions of high US trade barriers. The administration has recently raised aluminum and steel tariffs to 50 per cent from 25 per cent. US officials are currently engaged in trade talks with top Chinese officials in London, looking to secure a breakthrough. In the meantime, consumers are expecting price pressures to surge in coming years, while economists predict inflation to remain well above the Fed's 2 per cent target until at least 2027. A significant 42 per cent minority of poll participants - 44 of 105 - expect the FOMC to resume cutting rates in the fourth quarter of 2025 or later, with 20 predicting no cuts this year.
"High tariffs are here to stay, and they will produce elevated inflation that is sustained well into 2026," said James Egelhof, chief US economist at BNP Paribas.
"The Fed will see little need to cut... the lesson we have from history is, if inflation becomes entrenched in the economy, it can be very hard and very costly to remove."
There was no clear consensus on where the rate would be by end-2025, but about 80 per cent of economists - 85 of 105 - predicted the fed funds rate in a 3.75-4.00 per cent range or higher. Trump called for a full percentage point reduction to 3.25-3.50 per cent immediately on Friday. The president's signature bill making its way through Congress is expected to add US$2.4 trillion to an already enormous US$36.2 trillion debt pile, making a rate cut more unlikely.
"With more fiscal stimulus coming out of the tax and spending bill, the Fed sees less of a case for supporting the economy with lower interest rates," said Bill Adams, chief economist at Comerica Bank.
"The fiscal policy looks set to push the deficit (higher)... exerting continued upward pressure on long-term interest rates that will be a headwind for credit-intensive parts of the economy like the housing market and business capital spending."
The economy, which contracted 0.2 per cent last quarter on a widening trade deficit, is forecast to grow just 1.4 per cent this year, a sharp fall from 2.8 per cent in 2024. Next year, it was predicted to expand 1.5 per cent. That outlook was unchanged from May.