As economists warn that the Federal Reserve is increasingly behind the curve on rate cuts, fresh insights into central bank officials’ views on unemployment and inflation shed light on their hesitation to ease policy.
As of May, 14 members of the Federal Open Market Committee (FOMC) see upside risks to their unemployment and inflation forecasts.
In other words, policymakers are concerned that both joblessness and prices could exceed expectations, raising the specter of stagflation, the dreaded scenario where rising unemployment combines with persistent inflation to weaken the broader economy.
“The Fed continues to signal concern over a stagflationary outlook for the U.S. economy,” wrote The Kobeissi Letter in a recent note, adding: “This is why Powell hasn’t resumed rate cuts.”
Many economists, however, have downplayed the stagflation threat and still expect aggressive rate cuts to begin this fall.
As Investors Observer recently noted, Morgan Stanley strategists Matt Hornback and Michael Gapen are forecasting seven rate cuts in 2026 as the Fed tries to catch up after keeping rates steady for too long.
Meanwhile, analysts at private banking group Julius Baer expect the first of four cuts to start in October.
Markets preparing for rate cuts
Fed Chair Jerome Powell remains deliberately vague about the pace and timing of potential rate cuts, telling an audience at a monetary policy forum in Portugal that he “can’t say” whether July will be the right time to begin easing.
Interestingly, Powell noted that the Fed likely would have begun cutting rates already if not for President Trump’s tariffs, which are expected to push inflation higher this summer.
According to CME Group’s FedWatch Tool, the odds of a July rate cut stand at about 19%. However, the probability jumps to near-certainty by September — a key meeting when the Fed will also release its updated economic projections.
The central bank is also expected to cut rates again in October and December, according to FedWatch.
In the meantime, Powell and his fellow Fed board members are under mounting pressure from President Trump to cut rates. Trump argues that inflation is cooling while interest expenses are soaring — a combination he says demands deep, immediate cuts.
As Investors Observer reported, interest payments on the U.S. federal debt have reached $1.2 trillion annually, making them the largest federal expense after Social Security.
These payments now consume 18% of federal tax revenue, approaching the record highs seen in the 1980s.
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