Fed expected to hold rates through March, and possibly through Powell’s tenure, on strong growth
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The Federal Reserve Board building in Washington, D.C., undergoes construction in September.Ken Cedeno/Reuters
The U.S. Federal Reserve will hold its key interest rate through this quarter and possibly until Chair Jerome Powell’s tenure ends in May, according to a majority of economists polled by Reuters, a shift from last month when most expected at least one cut by March.
Expectations the U.S. economy will continue growing strongly argue against near-term cuts as inflation still remains above the Fed’s 2-per-cent target. But most economists still expect at least two reductions later this year. Concerns in financial markets and in policy circles are mounting over political interference in the Fed’s independent setting of interest rates and Fed policymakers are sharply divided over the outlook. U.S. President Donald Trump has repeatedly criticized Powell for not lowering rates more aggressively and the Justice Department has now threatened a criminal investigation against Powell related to building renovations on the Fed’s new headquarters. Trump’s attempt to remove Fed Governor Lisa Cook also awaits a Supreme Court hearing.
All 100 economists in the Jan. 16-21 poll expect the Fed to keep rates at 3.50 per cent to 3.75 per cent at its Jan. 27-28 meeting, with 58 per cent forecasting no change this quarter compared with at least one reduction in last month’s poll.
“The economic outlook on the surface suggests the Fed should remain on hold, maybe even consider putting hikes on the table sometime later this year or next year,” said Jeremy Schwartz, a senior U.S. economist at Nomura, among the most accurate forecasters for the U.S. economy in Reuters polls last year, according to LSEG StarMine calculations.
“In reality, though, we think the Fed will remain on hold for the remainder of Powell’s term through May, but we suspect the new leadership will likely manage to get another 50 basis points of rate cuts later in the year.”
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There was no clear consensus on rates beyond this quarter but a slight majority of respondents – 55 of 100 – expected rate cuts to resume as soon as Powell’s tenure as the Fed chair ends in May. Trump may decide on the next Fed chairman as early as next week, Treasury Secretary Scott Bessent said recently.
“There’s going to be more pushback than ever on the selection of the next chair, all because of the criminal investigation… I don’t expect Trump to be able to really fill the Fed with people who will cut interest rates,” said Bernard Yaros, lead U.S. economist at Oxford Economics. Meanwhile, the U.S. economy, which grew at a robust pace of 4.3 per cent in the third quarter, is expected to expand 2.3 per cent this year, up from 2.2 per cent last year, poll medians showed. That was upgraded from 2 per cent predicted last month and above the Fed’s estimated non-inflationary rate of 1.8 per cent.
Growth is forecast to average 2 per cent through 2028.
Yaros, who was the most accurate forecaster in Reuters polls last year, expects growth of 2.8 per cent this year, above consensus.
“We are looking for a very strong U.S. GDP growth in 2026 due to further investments in AI, but even more because of the tax cuts under the fiscal bill,” added Yaros. “We estimate the boost to the economy from the bill will amount to six-tenths of a percentage point in terms of annual average real GDP growth this year.”
That may also keep inflation higher for years to come. The change in the Personal Consumption Expenditures index – the Fed’s preferred inflation measure – is expected to stay above the 2-per-cent target for the remainder of this year and average above it in each calendar year through 2028, the poll showed.
The unemployment rate is expected to remain steady, averaging 4.5 per cent this year.
