Key Points

  • Inflation is likely to remain above the Federal Reserve's 2% target until 2027 or later, according to a survey released Monday by the National Association for Business Economics (NABE).
  • NABE said 40% of respondents predict a recession next year, citing the impact of changes in Trump administration economic policies.
  • "More aggressive trade and immigration policies are expected to have the largest impact on growth and inflation prospects," Sarah Wolfe, senior economist and strategist at Morgan Stanley Investment Management, said in a statement. "Most respondents believe we won't reach the 2% inflation target until 2027 or later," Wolfe said. "Therefore, the Fed's policy actions will remain restrictive for some time."

Deeper Analysis

According to CME Group's FedWatch tool, interest rate futures traders have raised the probability of the Fed holding the federal funds rate steady this month to 93%, up from 86% a month ago. They see a 53% chance the Fed will wait until June to make its next cut to the main rate from the current range of 4.25% to 4.5%.

The Fed cut its benchmark rate by a full percentage point cumulatively between September and December last year. At its January meeting, policymakers held borrowing costs steady, citing a lack of clarity on the inflation impact of policy changes on immigration, tariffs, regulation, and federal spending. Since then, they have expressed caution about further easing.

"Policy is currently moderately restrictive and clearly less restrictive than it was seven months ago," St. Louis Fed President Alberto Musalem said Monday. "I believe that the current patient approach will help us achieve maximum employment, price stability, and a durable economic expansion," he said in a speech.

Fed Chair Jerome Powell has for weeks described progress on curbing inflation as "bumpy" and predicted inflation will continue along an uneven path.

Policymakers received good news on Friday when the Bureau of Economic Analysis reported that their preferred gauge of price pressures—the core personal consumption expenditures price index, which excludes volatile food and energy prices—rose 0.3% month-over-month and 2.6% year-over-year in January, in line with expectations.

Meanwhile, the economy has recently shown signs of weakness. The Bureau of Economic Analysis said Friday that consumer spending fell 0.5% in January due to a pullback in purchases of cars and other durable goods, reflecting declining household confidence amid the risk of higher inflation from tariffs. Additionally, data released last week showed pending home sales fell to a record low in January, while initial jobless claims for the week ending February 22 also reached their highest level this year.

Recent weak data on consumer spending and business investment prompted the Atlanta Fed to abandon its February 19 forecast of 2.3% annualized growth for the first quarter. The agency now expects the economy to contract by 2.8% in the first quarter.

"While I continue to expect the economy to grow at a good pace over the coming quarters, I would be concerned if we start to see more evidence of consumer pullback or dampened business confidence and investment plans," Musalem said.

Nineteen percent of economists expect the economy to begin contracting in the second half of this year, up 7 percentage points from the previous NABE survey in August.

NABE surveyed its 151 members between February 7 and February 14.