MNI: Fed Dots To Show Steady Rates For 2026 - Ex-Staff

Federal Reserve projections for interest rates are set to float upward this week, with the median likely to show steady policy in the second half of the year before some modest easing in 2027, former Fed staffers told MNI.

The central bank's fresh Summary of Economic Projections will likely show the stagflationary imprint of the Middle East conflict, with growth revised a couple of tenths lower in 2026 and 2027, headline PCE inflation revised higher, and core PCE inflation revised closer to 3.0%. 

The dot plot should show a median of no rate cuts in 2026, with the fed funds rate at 3.6%, and interest rate easing by the end of 2027, the ex-staffers said. 

"My expectation is they'll be on hold and I don't think the center of the committee has hikes in their outlook yet," said Kurt Lewis, former special adviser to ex-Fed Chair Jay Powell. "There will be some people who call for it, but I don't think the center of the committee has hikes in their outlook yet. My expectation is that there will be a handful of people who call for hikes, but the vast majority will be on hold."

RATE CUTS

Additional easing steps for the FOMC as a whole likely won't come until 2027, assuming inflation recedes over time and inflation expectations are anchored, the ex-staffers said. (See MNI INTERVIEW: Warsh Could Overhaul SEP, Drop Dot Plot - Lewis)

William English, former director of the division of monetary affairs at the Fed Board, highlighted various scenarios for the economy but suggested interest rate cuts are likely next year. A higher long-term interest rate, however, could limit further cuts in later years, he said. 

"I think probably they'll have a funds rate that's basically flat, maybe until the end of next year, maybe it comes down a step at the end of next year. I'd be a little surprised if the median forecast was for a rate hike, but it could be," said English, now at Yale University. 

For this year, a minority of policymakers at the Fed are likely to project higher rates due to the energy shock, sticky inflation and the resurgent labor market, the ex-officials said. (See  MNI INTERVIEW: Fed Can’t Ignore Mounting Price Pressures-Liang)

Eric Swanson, a former San Francisco Fed economist, expects several Fed officials to pencil in higher borrowing costs. "I'm sure some of the members are going to have hikes in there, given what inflation is doing and the job market's pretty good. If I was an FOMC member, I'd be putting some hikes in for this year and next year," he said. 

HIGHER INFLATION

Former staffers expect the FOMC to change the sentence in its policy statement to eliminate the easing bias and are also foreseeing some upward revisions in the Fed's SEP forecasts for inflation as well as downward revisions to the central bank's growth projections. The Fed in March saw the economy expanding 2.4% this year, headline PCE ending the year at 2.7%, and unemployment at 4.4%. 

"I expect the median to show no cuts this year but perhaps a couple next year. I expect PCE inflation projection to rise above 3% in 2026 but core PCE to inch up only to 2.8% with little change to either in 2027. Unemployment may tick down in 2026 but only by a tenth or two," said Joseph Gagnon, former economist at the Federal Reserve Board of Governors.

The pass-through of the energy shock to core measures has been clear in the data, though perhaps not as much as some had feared, former Richmond Fed economist Peter Ireland said. 

"These same recent data support a consensus view that keeps monetary policy on hold for now, while still allowing for rate cuts later this year or next if inflation is seen falling back towards target," he said. "Probably, a few of the dots from March will shift up for both 2026 and 2027.  My guess, however, is that the modal dot for 2027 will still be at 3.00-3.25, suggesting two more rate cuts by the end of next year."