Not only does the full panel of economists surveyed by Wolters Kluwer feel the Federal Open Market Committee will not cut short-term rates at its meeting today and tomorrow, less than 10% expect it to act in July.
The Blue Chip Economic Indicators report also soundly discounts Pres. Trump’s call for the Fed Funds Rate to be reduced by 100 basis points.
If anything, the consensus average for a 2025 reduction continues to move lower, to 47 basis points, down from 60 basis points in the May survey and 65 basis points in April.
Why the Federal Reserve will cut rates
“The Federal Reserve would probably not cut rates if inflation were to stir,” the commentary in the report said. “However, recent results have been favorable,” meaning the latest Consumer Price Index and Producer Price Index reports.
“Inflation reports in coming months will probably show elevated results because of tariffs, but the Fed would most likely look through high-side readings as long as inflation expectations remain anchored,” the commentary said.
It noted “public comments from Fed officials have indicated that they will put more weight on long-term expectations because short-term measures often move erratically.”
How investment bankers see the “cut or no cut” decision
After the meeting, investment banker Louis Navellier is “expecting a dovish FOMC statement due to a weak Beige Book survey (in 9 of 12 Fed districts) and better-than-expected inflation results in the past four months,” he said in a June 16 commentary.
“I do not expect the retail sales report on Tuesday to influence the Fed, but I hope the FOMC statement will refer to better-than-expected inflation news rather than anticipating an inflation ‘bogeyman’ that has not materialized,” Navellier continued.
The FOMC does not want to be backed into a corner, explained Nigel Green, CEO of financial advisory the deVere Group in a commentary.
Committing too early to a rate cut, and then inflation was to return, “the credibility damage would be severe,” Green declared.
If the FOMC caves in to Trump’s demand for the 100 basis point cut to cushion the impact on the economy from the tariffs, the long end of the yield curve could surge.
“This means higher — not lower — borrowing costs for U.S. households and businesses,” Green said. “He should be careful what he wishes for.”
When economists expect the Fed to act
Besides the 9% in the Wolters Kluwer panel who expect the next short-term rate cut to come at the July meeting, 50% predict it would happen in September, while the remaining 41% of panelists answered “later.”
This compared with the May survey, when 20% expected the first cut to take place in June and 29% said July; the remainder said later.
“If they don’t cut their key interest rate this week, they should at least announce their intention to cut during their next meeting,” Navellier said in a June 17 note.
Green is in-between September and later for when the Fed will act next. “September is still on the table. But the bar is very high.”
When that cut comes, 93% said it would be only 25 basis points, while 7% responded 50 basis points, the Wolters Kluwer survey found.
Most respondents, 60%, felt tariffs would have a one-time impact on inflation, with 38% expecting a longer-lasting pickup.
A KMPG survey of institutional investors found nearly three-quarters, 72% believe two or more Fed interest rate cuts will happen this year.
“This partially aligns with the latest KPMG Economic Compass, in which Diane Swonk, KPMG chief economist, forecasts persistently high levels of uncertainty and uneven deregulation over the next two years, alongside two rate cuts by the Fed prior to the end of the year, starting in October,” a press release from the accounting firm said.
What is worrying the Fed?
The sense is “another shoe is about to drop” and this will keep the FOMC on the sidelines, said Greg McBride, chief financial analyst at Bankrate, in a pre-meeting comment.
“There is a tendency to romanticize the idea of interest rates coming down, but with the economy chugging along and a lot of uncertainty about what happens with inflation, there is nothing compelling the Fed to cut interest rates right now,” McBride said. “Further, we want interest rates to come down because inflation pressures are receding and the Fed can let the foot off the brake pedal, not because the economy is rolling over and in need of Fed stimulus.”
The impact on borrowing costs
Even though mortgage rates are not priced off of the Fed Funds Rate, investors drive the 10-year Treasury yield up or down based on their views of the economy. Nor is any action or no action a zero sum game.
“Borrowing rates are high, with mortgage rates near 7%, many home equity lines of credit in double-digit interest rate territory, and the average credit card rate still above 20%,” McBride said. “But savers continue to be rewarded with inflation-beating returns on the top-yielding savings accounts, money market accounts, and certificates of deposit.”
No matter what happens, the FOMC is in a bind.
“The Fed is facing an uncomfortable blend of sticky services inflation and new price pressures from tariffs,” Green said. “Rushing to cut rates in this environment risks sending the wrong signal.”
This meeting is more than just about rates, he continued. “It’s about the integrity of monetary policy in the face of political noise.”
