Wall Street Survey: The Federal Reserve will start cutting interest rates in June, and Waller's policy may lean towards easing

The Federal Reserve will maintain the benchmark interest rate unchanged before the current Chairman Jerome Powell's term ends, but will immediately cut rates after his successor takes office. A Reuters survey shows that economists expect the Fed to hold steady until May and implement rate cuts in June after Powell's departure. This expectation reflects the market's judgment on policy continuity and the anticipated differences in leadership styles between the old and new.

More than 70% of surveyed economists expressed concerns about the serious erosion of the Fed's independence. President Trump nominated Kevin Warsh last month to succeed Powell, having previously criticized Powell for not cutting rates quickly enough. Economists have differing views on Warsh's policy stance; his earlier comments leaned towards tightening, but recent statements regarding the anti-inflation effects of AI-driven productivity growth suggest he may lean towards rate cuts.

Among the 53 economists who answered additional questions, 49 believe Warsh is more likely to set policy too loosely rather than too tightly. This concern stems from his historically relatively dovish stance during Republican administrations and the reality that current economic data does not support significant rate cuts.

The survey predicts that the U.S. economy will grow between 2.0% and 2.4% this year, higher than the Fed's estimate of a 1.8% non-inflationary growth rate, while inflation is expected to be well above the 2% target. These data further reinforce concerns about overly loose policies.

Clear Short-Term Policy Path

A Reuters survey conducted from February 5 to 10 among 101 economists shows that 75 expect the Fed to keep the federal funds rate unchanged for the second consecutive time at next month's meeting, consistent with the signals released at the January meeting. This proportion has significantly increased 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 of the year most likely occurring in June. In last month's survey, economists had not reached a consensus on the rate level at that time.

Bank of America economist Stephen Juneau stated:

"The Fed will cut rates twice this year under Warsh's leadership, but this is not necessarily based on clear economic arguments. If the Fed continues to cut rates, these cuts will occur during a period when fiscal policy is more expansionary than last year. This could lead to overly loose policies."

Upward Revision of Economic Growth Expectations

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

The average growth rate expectation for the entire year of 2026 has been revised upward from last year's 2.2% to 2.5%, marking the third consecutive upward revision in the Reuters monthly survey. Inflation is expected to be well above the Fed's 2% target this year.

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

Controversy Over Warsh's Policy Stance

Market confusion over Warsh's policy views stems from the differences in his statements over time. **Early writings and speeches indicate a preference for stricter policies, while recent statements suggest a tendency towards rate cuts, including an optimistic view on the anti-inflation effects of AI-driven productivity growth **

Oscar Munoz, Chief U.S. Macro Strategist at TD Securities, stated:

"It is clear that Waller will push for further easing of policy this year. The question now is whether he will advocate for a few more rate cuts based on economic developments or push for more cuts. He has historically taken a hawkish stance during Democratic administrations, but not during Republican ones. In theory, policy should not really depend on who the U.S. president is, but there are indeed concerns that his views do not truly reflect the current economic situation."

Some economic forecasts in the survey, including an 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, pointed out:

"Trump expects Waller to deliver the results he wants to see. But we must remember that he only has one vote out of 12, and he still needs to persuade many other Fed officials who are very skeptical or reluctant to meet the expectations of the president for the new Fed chair."

Many economists indicate that we need to wait for Waller to express more opinions at the anticipated nomination hearing before making further judgments about the independence of the Fed. Economists are divided on whether the independence of the Fed has changed since Trump nominated Waller last month