Key Points

  • Most economists told the National Association for Business Economics (NABE) that inflation could remain above the Federal Reserve's 2% target until after 2026, and that a weakening labor market is prompting Fed policymakers to consider cutting interest rates as early as mid-September, even though such a move could intensify price pressures.
  • Data released by NABE on Monday showed that 56% of surveyed economists predict inflation, as measured by the Personal Consumption Expenditures (PCE) price index, will not fall to 2% before 2027, up from 45% in the March survey.
  • "A majority of respondents still expect the Federal Open Market Committee (FOMC) to cut short-term interest rates by at least 50 basis points by the end of 2025," said Sarah Wolfe, senior economist at Morgan Stanley Wealth Management, in a statement.

In-Depth Analysis

Fed Chair Jerome Powell on Friday, while expressing concerns about tariff-driven inflation, pointed to signs of a weakening labor market and hinted that the central bank could make its first rate cut of the year at its next policy meeting on September 16-17.

"The downside risks to employment are rising," Powell said in his remarks. "If these risks materialize, they could appear quickly in the form of a surge in layoffs and a rise in the unemployment rate."

At the same time, Powell noted that "near-term inflation risks are tilted to the upside," and risks could intensify if tariffs trigger a sustained inflation spiral.

Powell said policymakers are facing a "challenging situation," having to contend with the prospect of higher inflation while also addressing "downside" risks to employment. He estimated that the core PCE index, which excludes volatile food and energy prices, likely rose 2.9% last month, a slight increase from 2.8% in June.

The NABE survey showed that a majority of surveyed economists believe tariffs implemented by the Trump administration this year could push inflation up by 0.5 percentage points and similarly drag on economic growth by 0.5 percentage points.

However, many respondents pushed back their forecasts for when a recession might begin. NABE said 35% of respondents expect a recession to begin in 2027 or later, up from 25% in the March survey; 17% expect one to begin in the second half of this year, down from 19% in March.

When asked to list the top three policy challenges the Trump administration should address in the coming years, 60% of surveyed economists cited reducing the federal budget deficit, 40% called for immigration reform, and 36% listed sustaining economic growth as a top priority.

Emily Kolinski Morris, chief economist at Ford Motor Company, said in a statement that economists have "less confidence in the current fiscal and monetary policy stance than they did in the March 2025 survey."

NABE said six in ten surveyed economists believe fiscal policy is "too stimulative," up from 50% in the March survey and the highest proportion in seven years.

Wolf said during a NABE webinar that nearly four-fifths of surveyed economists believe the fiscal costs of the tax and spending legislation pushed by Trump and passed by Congress last month outweigh its benefits to the economy.

"I find it remarkable that the number of people who think fiscal policy is too stimulative has reached a multi-year high," she said, even compared to the period of significantly increased federal spending earlier this decade.