Most Economists Rule Out Fed Rate Cut in 2026 Amid Inflation Risks from War
A Reuters poll shows a dramatic shift in sentiment: less than 50% of analysts now expect a rate cut by December, compared to 66% a month earlier. About half of respondents forecast rates to remain unchanged, and some even anticipate a hike due to the war.
Here is an analytical breakdown in the style of an independent financial analyst — focusing on non-obvious consequences and hidden dynamics that the media overlook.
The Reuters Poll No One Noticed: Why Markets Are Wrong and the Fed Is Already Trapped
The Reuters poll of May 19, 2026, revealed a radical reversal in sentiment. Less than 50% of economists now expect a Fed rate cut by year-end — down from 66% a month earlier. About half forecast rates to stay unchanged, and some even anticipate a hike. At first glance, it's a routine tightening of forecasts amid the war. On second glance, it's a quiet collapse of market consensus that will change everything: from mortgage rates in Ohio to bond yields in Tokyo.
But the real story isn't in the poll numbers. The real story is that markets still haven't realized: the Fed is in a no-win situation. It has no good options. Only bad and very bad ones.
[The Core]: What's Really Happening
Official data and forecasts look like this: the key rate has been in the 3.50%-3.75% range since December 2025. Inflation in May 2026 reached 3.8% — the highest since 2023. The war in Iran, which began on February 28, has pushed energy prices up. Futures markets now narrowly price in a 25-basis-point rate hike by the end of January 2027, and the yield on 10-year Treasury notes has surged above 4.6% — a one-year high.
But official data doesn't show the main thing.
What's really happening? The Fed is caught between a rock and a hard place. On one hand, the war is creating persistent inflationary pressure. Fed Governor Michelle Bowman stated outright on May 29, 2026: "The longer the war in Iran continues, the higher the risks to inflation," and a prolonged energy shock will exert upward pressure on inflation later this year. On the other hand, raising rates would cripple an economy already showing signs of labor market cooling.
The minutes of the April FOMC meeting, released on May 20, showed that an "overwhelming majority" of committee members noted an elevated risk that inflation would return to the 2% target later than expected. At the same time, most believed that "some tightening of monetary policy would likely become appropriate" if inflation remained persistently above target.
But here's the key nuance almost everyone misses: this statement was made under outgoing Chair Jerome Powell. The next FOMC meeting on June 16-17, 2026, will be chaired by Kevin Warsh.
And that's where it gets interesting.
Timeline and Context
Let's piece together the picture that mainstream media assembles from scattered fragments.
December 2025 — The Fed cuts rates for the last time by 25 basis points to the 3.50%-3.75% range. Markets expect the easing cycle to continue in 2026.
February 28, 2026 — The US and Israel launch the first strikes on Iran. Oil prices surge 40%.
March 18, 2026 — Jerome Powell holds his last press conference as Fed Chair. He warns that the Iran conflict has created "new inflationary pressures" and prompted FOMC members to "reconsider the possibility of further short-term rate cuts."
April 2026 — The FOMC holds rates steady. One of the twelve board members — Steven Miran — votes for a 25-basis-point cut.
April 29, 2026 — The FOMC issues a statement with language suggesting the next move could be a rate cut.
May 2026 — A stream of hawkish signals. On May 19, the Reuters poll shows a radical reversal: less than 50% expect a rate cut in 2026. On May 20, the April meeting minutes are released with inflation warnings. On May 29, Michelle Bowman speaks in Iceland and says a prolonged energy shock could make her reconsider her approach to the risk balance.
Late May 2026 — May inflation data shows 3.8% — the highest since 2023. The futures market begins pricing in a rate hike.
But the key point everyone misses: all this is happening during a transition of power at the Fed. Warsh hasn't formally taken office yet (though he's already appointed), and markets are already trying to guess his policy.
Who Wins and Who Loses
Who wins:
First — the US dollar, but not as it seems. Commerzbank explains: the dollar traditionally benefits during periods of rising inflation because the Fed has a reputation as an active central bank that responds early and aggressively. However, Commerzbank analysts warn: "I wouldn't rely solely on the speed of reaction... a currency's profitability depends not on the nominal interest rate but on the real rate." US inflation could be higher than in other countries, offsetting the dollar's advantage.
Second — short-term volatility traders. The spread between market expectations (rate hike) and Fed signals ("holding for now") creates an ideal environment for bets on increased volatility. Options on Treasury bonds are the most undervalued asset right now.
Who loses:
First — holders of long-dated bonds. The yield on 10-year Treasuries has already exceeded 4.6%. If the Fed signals a rate hike — and Bowman on May 29 effectively left that door open — long-dated bonds will fall another 5-8%.
Second — tech stocks with high debt loads. They benefited from expectations of rate cuts in 2026. Those expectations are now dead. Tesla, Amazon, and other "dollar" stories will be revalued downward.
Third — emerging markets that priced in Fed easing in the second half of 2026. If rates stay high and the dollar remains strong, dollar-denominated debt becomes unmanageable. India, Brazil, South Africa — all under pressure.
What the Media Leaves Out
The main non-obvious insight missing from news about the Reuters poll: Kevin Warsh is not just a "new chair." He is a chair who has publicly criticized the easy-money policies of Bernanke, Yellen, and Powell and insisted on a "more moderate" reduction of the Fed's balance sheet. He believes that years of loose Fed policy are the root cause of current inflationary pressures.
What does this mean in practice? It means Warsh will resist rate cuts even more than Powell. And he will be less sensitive to political pressure from Trump, who simultaneously appointed him and demands rate cuts. This creates a unique dynamic: a hawkish chair under a dovish president.
A second hidden factor: Bowman on May 29 said something markets ignored, but shouldn't have. She stated that the Fed could "look through the energy shock if it maintains confidence in monetary policy," and that reacting to a temporary energy shock could unnecessarily harm the economy. This is a signal: the Fed is willing to tolerate higher inflation longer than the market expects if it helps preserve employment. But there's a nuance: Bowman also added that if disruptions last "into the second half of the year," we could see broader effects on inflation.
A third fact that goes unmentioned: the gap between economists' expectations (Reuters poll) and market expectations (futures) is the widest in two years. Futures price in a 30% probability of a rate hike by the end of 2026, while most economists in the Reuters poll still forecast rates to stay unchanged or see one cut. Such a gap cannot persist for long. Either economists are wrong, or markets are. And the stakes are very high.
Forecast: Next 30 Days and 90 Days
30 days:
The FOMC meeting on June 16-17 will be Kevin Warsh's first as chair. I expect rates to remain unchanged in the 3.50%-3.75% range. This is nearly consensus.
But the key will be the statement language and press conference. If Warsh signals a "readiness to act" (i.e., raise rates) if inflationary pressures persist — expect an immediate bond sell-off. If he emphasizes the "temporary nature" of the energy shock — markets will breathe a sigh of relief, and the dollar will weaken slightly.
My forecast: Warsh will be tougher than the market expects. He needs to prove his hawkish reputation is not empty talk.
90 days:
By the end of August, much will depend on the Middle East. If the war drags on, oil stays above $90 a barrel, and inflation doesn't ease — the Fed will be forced to raise rates to 4.00%-4.25% by the end of 2026. If a ceasefire is reached (unlikely given Trump's rhetoric), rates will stay put, and markets will begin pricing in cuts in 2027.
The first scenario is more likely. Nomura has already moved its forecast for the first cut from June to September 2026, and then revised expectations toward tightening. BofA also sees asymmetric risk toward a rate hike.
Editorial Forecast
Asset: 10-year US Treasury bonds (US10Y).
Direction: Price decline (yield increase) of 10-15 basis points in the next 48-72 hours. I expect yields to move toward 4.70%-4.75%.
Key levels: Current yield around 4.60%; resistance at 4.65%; a break above 4.65% would open the path to 4.75%-4.80%.
Confidence level: High (80%).
Main risk: An unexpected statement from Warsh before taking office that he sees an "urgent need to support economic growth" (i.e., a signal of easing). This would crash yields to 4.40%-4.45% within 24 hours and trigger a bond rally. However, given Warsh's reputation as an "inflation hawk," this risk is extremely low.
The editorial opinion is not an investment recommendation.
— Editorial Team
