Persistent inflationary pressures stemming from geopolitical conflicts have led to a widespread reversal in expectations for Federal Reserve interest rate cuts. The central bank is seen as having almost no justification to act, with more optimistic scenarios now largely off the table.

A Reuters survey of 102 economists indicates a high probability that the Fed will leave its benchmark interest rate unchanged for the remainder of 2026.

Seventy-two respondents, approximately 70%, believe the rate will stay within the current 3.50% to 3.75% range. This marks a significant increase from less than half holding this view last month and around one-third a month prior.

The survey was conducted between June 4 and June 9. All participating economists unanimously agree there will be no rate cut following the Federal Open Market Committee meeting on June 16-17, which will be the first meeting chaired by the new Fed Chair, Kevin Warsh.

Tom Porcelli, Chief Economist at Wells Fargo, stated, "In the current and foreseeable environment, it is nearly impossible for the Fed to find a rationale for action. Reaching a consensus among officials for a rate cut would be extremely difficult." He added, "The only possible scenario would be a rapid resolution to the Iran conflict, but there is no sign of that trend at present."

The survey results reflect that inflation is proving more persistent than previously anticipated, driven by energy shocks from the Middle East conflict. Interest rate futures markets are even pricing in the possibility of at least one rate hike by the end of 2026.

The stronger-than-expected May jobs data is seen as weakening the case for cuts. Meanwhile, inflation remains significantly above the Fed's 2% target, at roughly double that level, and is unlikely to decline markedly in the short term after more than five years of elevated price pressures.

Philip Marey, Senior US Strategist at Rabobank, noted, "Risks are skewed toward inflation lasting longer, fewer rate cuts, or even a potential shift toward hikes, rather than a rapid easing." He stated bluntly, "The more optimistic scenarios have essentially vanished."

Another Reuters survey projects that the consumer inflation rate for May 2026 could rise to 4.2%, hitting a more than three-year high, with core inflation forecast at 2.9%. The related data is scheduled for release on June 11.

The Personal Consumption Expenditures price index, which the Fed closely monitors, rose 3.8% year-over-year in April 2026, the highest level since May 2023. Forecasts suggest this measure will average 3.9%, 3.8%, and 3.6% in the second, third, and fourth quarters of 2026, respectively.

Although last month most economists still believed the current inflationary pressures were primarily temporary, stemming from energy shocks related to the Middle East conflict, this assessment is shifting.

Eli Nir, US Economist at TD Securities, said, "Supply shocks are typically one-off and transitory, but if they occur consecutively, they can alter inflation expectations in ways we haven't anticipated before." He added, "There is widespread concern that these shocks could morph into more persistent inflation, as we misjudged the situation back in 2022."

The survey also shows many economists expect the Fed to drop its previous dovish bias in this month's policy statement. Most institutions have pushed their rate cut expectations into 2027 or removed them entirely, with only a minority viewing a rate hike as the next possible move.

Concurrently, some respondents anticipate that the Fed's upcoming "dot plot" will show interest rates holding steady through 2026, or possibly even signal a hike. This contrasts with the March 2026 projections, which still indicated one rate cut within the year.

Forecasts for the economic fundamentals show little change: US economic growth is expected to remain around 2% in the coming years, with the unemployment rate stabilizing at approximately 4.3% or slightly higher.

Against this backdrop, Warsh, who was nominated by former President Trump and faces pressure to cut rates, may find it difficult to build a consensus within the FOMC in support of monetary easing.