Federal Reserve Survey: Under the Shadow of Stagflation, Most Respondents Still Expect the Central Bank to Cut Interest Rates This Year

According to the Zhitong Finance APP, under the shadow of "stagflation" characterized by high inflation, high unemployment, and economic slowdown, the market is increasingly pessimistic about the outlook for the U.S. economy. However, the latest May Federal Reserve survey from foreign media shows that most respondents still expect the Federal Reserve to cut interest rates this year and next to address the worsening economic weakness.

The survey indicates that in the face of persistently high prices driven by tariffs, as well as a simultaneous weakening of growth and employment, 65% of respondents believe the Federal Reserve will choose to cut interest rates to respond to economic weakness, even with inflation remaining high. In contrast, only 44% held this view in the March survey, when most believed the Federal Reserve would keep rates unchanged. Now, only 26% believe the Federal Reserve will remain inactive, and only 3% of experts think the Federal Reserve will raise rates in a stagflation environment.

The survey included a total of 31 participants, including fund managers, market analysts, and economists. They predict that the Federal Reserve's federal funds rate will drop to 3.71% by the end of 2025 and further to 3.36% by the end of 2026, indicating a reduction of nearly 100 basis points from the current level of 4.33%.

Stagflation Expectations Rise: Inflation Rebounds, Unemployment Rises, Recession Probability Increases

Economic fundamentals are expected to deteriorate sharply. The probability of the U.S. entering a recession within the next 12 months has soared from 22% in January to 53%, marking the largest increase between two surveys since 2022. At that time, the Federal Reserve was initiating a rapid rate hike cycle to curb inflation.

According to survey expectations, the U.S. consumer price index is projected to rise from the current 2.4% to 3.2% by the end of the year, but is expected to fall back to 2.6% by 2026. The unemployment rate is expected to rise from the current 4.2% to 4.7% and remain around that level in 2026. In terms of economic growth, the GDP growth forecast for this year is only 0.8%, significantly lower than last year's 3.1%.

Lou Brien, a strategist at DRW Trading Group, stated: "The Federal Reserve must demonstrate a stance against inflation, but in reality, they will respond more sensitively to weakness in the labor market. Once the unemployment rate rises a few percentage points or non-farm employment turns negative, the Federal Reserve will cut rates and claim that economic weakness will alleviate inflationary pressures."

However, there are also voices warning that this move will come with structural costs. Richard Bernstein Advisors founder Richard Bernstein believes this equates to "the Federal Reserve abandoning its 2% inflation target, possibly a permanent concession," although the Federal Reserve officially insists that this target will not change.

Looking ahead, respondents expect economic growth to rebound to around 2% by 2026, with some attributing this to the tax cuts and deregulation policies implemented by the Trump administration. Jefferies' chief U.S. economist Thomas Simons stated: "By the second half of 2026, the government's policies on taxation and regulation will drive the economy back onto a growth track."

Concerns Over Overvalued Stock Market Intensify, Investor Confidence Lacks

Against the backdrop of continuously deteriorating economic expectations, respondents generally believe that current stock market valuations do not adequately reflect the impending risks. 45% believe the stock market has not accounted for recession risks, while 52% indicate that valuations are only "partially reasonable." Overall, 69% believe that the stock market is "significantly or partially overvalued," up from 56% in the March survey.

Despite this, the S&P 500 index is expected to remain flat overall this year but is projected to rise nearly 11% by the end of 2026. Hugh Johnson, an economist at Hugh Johnson Economics, noted, "Although stock price valuations do not seem high, market optimism remains excessive. The stock market likely still has downside potential."

Trade Policy Casts Economic Shadow; Tariff Impact Severely Underestimated

The survey also revealed that the pessimism regarding economic expectations partly stems from the market's general belief that high tariffs will become a long-term policy. 63% of respondents believe that after a new round of trade agreements is reached, the U.S. will maintain a 10% across-the-board tariff. The vast majority of respondents believe that tariffs have a negative impact on U.S. economic growth, employment, and inflation.

Constance Hunter, chief economist at The Economist Intelligence Unit, stated, "The uncertainty surrounding tariff policies and their targets is suppressing corporate investment plans and new orders." Jack Kleinhenz, chief economist at the National Retail Federation, added, "While everyone is concerned, no one can accurately predict the direction of this tariff storm. We hope that price-sensitive consumers can withstand the impending shock."

More worryingly, among those who believe tariffs are harmful to the economy, 74% stated that the government's promised tax cuts and deregulation policies cannot offset the negative impact of tariffs. Drew Matus, chief market strategist at MetLife Investment Management, believes, "Tariffs should be introduced after tax cuts so that the negative impact follows the positive stimulus."

Additionally, 73% of respondents believe that the government's stance on tariffs, immigration, and foreign policy has damaged the United States' international image, negatively affecting the image of American companies abroad, and 83% believe this has also reduced the attractiveness of U.S. assets