Strong Inflation and Labor Force Pressure Rate Cut Expectations
Economists have again raised their projections for US headline inflation for this year, while also predicting the labor market will remain stronger than previously expected. This revised projection further diminishes the likelihood of a Federal Reserve interest rate cut, with the expectation that it will not open until 2027.
According to a Bloomberg survey of economists, the core Personal Consumption Expenditures (PCE) price index, which excludes food and energy prices, is now expected to rise 3.2% annually in the fourth quarter. Meanwhile, the headline inflation estimate is relatively unchanged at around 3.5%.
These projections indicate that inflationary pressures in the United States are still not close enough to meet the Fed's 2% target. Although oil prices have fallen following the interim agreement between the US and Iran, the impact of the previous energy surge is still expected to spread through supply chains and service prices.
Economists also cut their unemployment rate projections for the remainder of the year and raised their job creation forecasts. These changes come after several stronger-than-expected US employment data. The continued solidity of the labor market has led the Fed to focus more on suppressing inflation rather than providing stimulus through interest rate cuts.
The survey also showed that the median economist expects the Fed to maintain interest rates until finally cutting them in June 2027. However, some economists and Fed officials still leave open the possibility that the central bank could raise interest rates before the end of the year if inflation does not show a convincing decline.
Expectations for economic growth have also been raised. Respondents raised their projections for US gross domestic product for the second quarter, although average economic growth for 2026 is still estimated at around 2.1%. This means the US economy is still considered strong enough, but not yet weak enough to prompt the Fed to immediately shift to a more lenient policy stance.
This Bloomberg survey of 86 economists was conducted June 19–24, following Kevin Warsh's first press conference as Fed Chair. During the meeting, the Fed maintained interest rates but signaled that inflationary pressures remain a major concern. The Fed's previous internal projections also showed inflation rising sharply by the end of 2026, reinforcing the narrative that tighter policy could persist for longer.
For financial markets, this shift in expectations has the potential to support the US dollar, as higher interest rates remain attractive for longer, making dollar-based assets attractive. Conversely, gold could face further pressure as the precious metal offers no yield. However, if inflation data begins to decline faster than expected or geopolitical risks increase again, gold could still benefit from safe-haven demand.
Overall, these survey results emphasize that the market should not expect the Fed to cut interest rates too quickly. As long as core inflation remains high and the labor market remains strong, the US central bank will likely maintain a cautious stance, even leaving room for rate hikes if price pressures worsen. (arl)
Source: Newsmaker.id
