The ongoing war between the US and Iran, lasting for weeks, has created increasing uncertainty and rising oil prices, raising inflation risks. At this point, there is talk that the Fed may postpone interest rate cuts until the end of the year, or even raise rates if deemed necessary.
While the possibility of an interest rate hike is starting to be priced into CME FedWatch, some analysts say the likelihood of the Fed raising interest rates is low.
The Fed stated it would continue to rely on data, while the International Monetary Fund (IMF) released its expectations regarding the US central bank.
According to Bloomberg, the IMF said the Fed is expected to make only one interest rate cut this year.
According to the IMF’s annual review of the US economy, known as the Article IV consultation, the IMF expects only one interest rate cut by the end of 2026.
At this point, the IMF report states that policymakers do not have much room to cut interest rates this year.
The IMF stated that their main concern was inflation stemming from rising energy prices.
IMF officials stated that certain critical conditions must be met for more aggressive interest rate cuts. These include a significant weakening of the labor market and the elimination of upward pressure on inflation expectations.
“The IMF assessed that further monetary easing/interest rate cuts would only be possible if inflationary pressures do not increase, i.e., if there is no significant deterioration in the labor market outlook and no increase in short-term inflation expectations stemming from rising oil and commodity prices.”
In line with IMF projections, the US policy interest rate is expected to reach 3.25%-3.5% by the end of this year. This would mean only a 25 basis point interest rate cut from the current rate (3.5%-3.75%).
The IMF stated, “This will enable the economy to return to full employment and a 2% inflation rate in the first half of 2027.”
*This is not investment advice.