The prospect of the Federal Reserve cutting interest rates this year is fading as inflation worries persist, fueled by rising gas prices stemming from the ongoing war in Iran. Longer-term interest rates have already climbed since the conflict began in late February, increasing borrowing costs for mortgages, auto loans, and businesses.
Wall Street investors are now weighing the possibility of an actual rate hike by the Fed, a significant shift from earlier this year when discussions centered on the timing and extent of potential rate cuts. While most economists still view a rate hike as unlikely, the fact that it's even a plausible scenario underscores the uncertainty surrounding the economic outlook. Krishna Guha, head of economics at Evercore ISI, suggests that rate cuts are likely delayed, potentially into 2027.
Austan Goolsbee, president of the Federal Reserve Bank of Chicago, stated that if inflation rises while unemployment remains stable and inflation expectations increase, rate increases would need to be considered. Economists at UBS anticipate that inflation, as measured by the Fed's preferred gauge, will rise to 3.4% this month and remain above the 2% target at year-end.
Despite concerns about the potential economic impact of rising rates, many Fed officials are currently more concerned about the threat of higher inflation. Federal Reserve Chair Jerome Powell acknowledged the challenge of dismissing the inflationary impact of rising gas prices as temporary, given that inflation has remained above the 2% target for the past five years. This suggests the Fed is likely to keep its key rate unchanged in the coming months.
