Wall Street survey: The Federal Reserve will start cutting rates in June, Walsh's policy may be relatively loose

The Federal Reserve will keep its benchmark interest rate unchanged until the end of current Chairman Powell's term, but will cut rates immediately after his successor takes office. According to a Reuters survey, economists expect the Fed to hold steady until May and cut rates after Powell steps down in June. This expectation reflects the market's judgment on policy continuity and anticipated differences in leadership styles between the old and new chairmen.

More than 70% of surveyed economists expressed serious concerns about a significant impairment of the Fed's independence. President Trump last month nominated Kevin Warsh to replace the Fed chair, and Trump has previously criticized Powell for not cutting rates quickly enough. Economists are divided on Warsh's policy stance; his earlier remarks favored tighter policy, but his recent comments, which suggest that AI-driven productivity growth is disinflationary, imply he may lean toward cutting rates.

Among 53 economists who answered additional questions, 49 believe that Warsh is more likely to set policy too loose rather than too tight. This concern comes from his historically dovish stance under Republican administrations and the fact that current economic data does not support substantial rate cuts.

The survey expects the U.S. economy to grow 2.0% to 2.4% this year, higher than the Fed's estimated non-inflationary growth rate of 1.8%, while inflation is expected to remain well above the 2% target. These data further reinforce concerns about overly loose policy.

Short-term policy path is clear

A Reuters survey of 101 economists from February 5 to 10 showed that 75 expect the Fed to keep the federal funds rate unchanged for a second consecutive meeting next month, consistent with the signal sent from the January meeting. This ratio has risen sharply from 58% last month.

Nearly 60% of economists expect rates to fall to the 3.25%-3.50% range by the end of the second quarter, with the first rate cut this year most likely to happen in June. In last month’s survey, economists had not reached a consensus on the rate level by then.

Stephen Juneau, U.S. economist at Bank of America, said:

"The Fed will cut rates twice this year under Warsh’s leadership, but this may not necessarily be based on clear economic arguments. If the Fed continues to cut, these cuts will happen at a time when fiscal policy is more expansionary than last year. This could lead to excessive easing."

Growth expectations revised up

The survey shows that U.S. economic growth will slow to an annualized 2.9%, seasonally adjusted, in the fourth quarter of 2025, down from 4.4% in the third quarter. Economists expect full-year growth this year to be between 2.0% and 2.4%, higher than the Fed's estimated non-inflationary rate of 1.8%.

The average growth expectation for 2026 has been revised up to 2.5% from last year's 2.2%, marking the third consecutive monthly upgrade in Reuters’ survey. Inflation is expected to remain well above the Fed's 2% target this year.

Most forecasters expect at least two rate cuts this year, basically in line with January’s survey, but there is still no clear consensus on the year-end rate level.

Controversy over Warsh’s policy stance

Market confusion about Warsh’s policy stance stems from the inconsistency in his past and present statements. His earlier works and speeches leaned toward stricter policy, while his recent statements imply a preference for cutting rates, including optimism about AI-driven productivity gains having a disinflationary effect.

Oscar Munoz, chief U.S. macro strategist at TD Securities, said:

"It’s clear that Warsh will push for further easing this year. The question now is whether he will push for a few more cuts in response to evolving economic conditions, or go for even more. He has historically held a hawkish stance under Democratic administrations, but not under Republican ones. In theory, policy-making shouldn’t depend on who is President, but there are concerns that his views do not necessarily reflect the current economic situation."

Some of the economic forecasts in the survey, including the unemployment rate stabilizing around 4.5% this year, do not support the necessity for multiple rate cuts.

Concerns about independence and checks and balances

James Knightley, chief international economist at ING, said:

"Trump expects Warsh to deliver the results he wants to see. But we must remember he has only one of the 12 votes, and he still needs to persuade many other Fed officials who are skeptical or unwilling to meet the President’s expectations for the new chairman."

Many economists say more comments from Warsh are needed at the expected confirmation hearing before further judging the Fed's independence. Economists are divided on whether Fed independence has changed since Trump’s nomination of Warsh last month.

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