• Nearly half of economists now expect the Federal Reserve to hold rates unchanged through 2026, a sharp reversal from earlier expectations.
  • Core PCE inflation is forecast to average 3.9% in Q2 before easing later, fueling a more hawkish consensus.
  • Traders have pared back pricing for near-term cuts, pushing potential easing to late 2026 or beyond.

Inflation Stalls, Patience Wears Thin

The prospect of Federal Reserve rate cuts is rapidly receding as new data reveals stickier inflation. According to a Reuters poll released this week, economists have significantly revised their outlook: nearly 50% of respondents now see the Fed holding its benchmark rate in the current 3.50–3.75% range through 2026, up from just a quarter in April. “The inflation momentum is proving stubborn,” said one poll participant. “The Fed can’t cut until it sees sustained improvement in core measures.”

The latest projections for core PCE inflation—the Fed’s preferred gauge—have been marked up to an average of 3.9% in the second quarter, moderating only slowly thereafter. This follows a series of hotter-than-expected readings in early 2026, driven partly by rising energy costs and supply-chain pressures linked to geopolitical tensions. “Higher energy prices are feeding through to core goods and services,” noted a senior economist at a major investment bank, speaking on condition of anonymity. “That’s delaying the disinflation process.”

Market Rethinks Rate Path

Financial markets have quickly adjusted. Fed funds futures now imply a less than 20% probability of a cut by September, compared with over 40% a month ago. The first fully priced-in reduction shifted to December 2026, with total easing expected to be limited to just 25 basis points this year. Bond yields have edged higher, with the 10-year Treasury note hovering near 4.60%, while equity markets have wobbled as growth stocks face higher discount rates. “The re-pricing has been swift,” a foreign exchange strategist said. “It’s a clear signal the market is listening to the Fed’s ‘higher for longer’ message.”

No Quick Relief for Borrowers

For consumers and businesses, the delayed cuts mean mortgage rates, auto loans, and corporate borrowing costs will remain elevated. Homebuilders report a slowdown in new construction, while retailers cite cautious consumer spending. “Every month of higher rates squeezes the most leveraged households,” a retail analyst remarked. Still, banks are benefiting from wider net interest margins, and some energy companies are capitalizing on higher oil prices.

Global Ripple Effects

The Fed's renewed hawkish stance is resonating abroad. Central banks in Europe and Asia, which had begun signaling easing, are now reassessing their own timelines. The dollar has strengthened, putting pressure on emerging-market currencies and complicating disinflation efforts in commodity-importing nations. “A patient Fed means global monetary conditions will stay tighter for longer,” a former IMF economist said.

What’s at Stake

Fed officials have reiterated their data-dependent approach, emphasizing that policy will remain restrictive until inflation convincingly heads toward 2%. Minutes from the April FOMC meeting showed “many participants” highlighted upside risks to the inflation outlook. Without clear progress, economists warn, the risk of overtightening—and tipping the economy into recession—grows. “The Fed is walking a tightrope,” the senior economist said. “They need to see enough softening to cut, but not so much that growth collapses.”

As of press time, the Fed had not commented on the latest poll. Core PCE data for May is due in two weeks and will be closely watched for signs of a cooling.

Correction: An earlier version of this article misstated the date of the poll; the results were released in June.