Economic Outlook: Interest Rates and Growth
The recent CNBC survey has revealed that despite the expected arrival of a new Trump-appointed Federal Reserve chair, respondents are forecasting modest changes to the funds rate over the next two years. The survey shows that the average outlook is for two more quarter-point cuts this year, or 50 basis points, with no reductions expected yet for 2027. The funds rate is seen settling around 3% this year and staying there through 2027.
Interest Rates and Inflation
President Donald Trump has said that U.S. rates should be among the lowest in the world and has asked for the Fed to reduce interest rates to 1%. Given a 2% inflation rate, the president is essentially asking for negative real rates. However, the survey suggests that the Fed will not drive down overnight rates toward the low levels demanded by the president.
Economic Growth and Unemployment
The survey also found that gross domestic product is forecast to come in at 2.4% this year and 2.2% next year, both higher than what the Fed has typically viewed as potential growth of the economy. The unemployment rate is seen rising just a tenth from the current level to 4.5% by year-end and dropping slightly next year. "We anticipate continued solid and more consistent economic growth in 2026, underpinned by fiscal stimulus and easier monetary policy," said Kathy Bostjancic, chief U.S. economist with Nationwide.
Inflation and Recession
The consumer price index is forecast to end the year at 2.7% and decline to 2.5% in 2027. The CPI can run around a half point higher than the Fed’s preferred personal consumption expenditures inflation gauge, so the forecast suggests the Fed comes close to its target by the end of this year and hits it by 2027. Also, the recession probability over the next year has declined to 23% from 30% in the December survey.
Tariff Impact
Tariffs remain a significant source of concern, but 58% of respondents say the majority of the tariff effects are behind the economy. Still, large majorities say they will continue to drag down growth, unemployment, and retail margins while pushing up inflation. The average respondent sees tariffs raising inflation by about 0.3% this year.
Positive Factors
The economy is seen gaining momentum from capital spending and a strong consumer. More than two-thirds of respondents believe business investment will be stronger in 2026 than in 2025, likely the result of huge spending on artificial intelligence, but also tax changes stimulating investment. Nearly three-quarters believe consumer spending will be higher or the same as in 2025, which is good news because last year was a strong year.
Risks and Concerns
Despite the positive outlook, there are risks, with the top concern among respondents being "uncertainty around the Trump administration’s actions and policies," followed by the bursting of the AI bubble, threats to the Fed’s independence, high inflation, and tariffs. "Policy uncertainty acts as a tax on the economy," said Diane Swonk, chief economist at KPMG. "It causes paralysis."
Next Fed Chair
The survey found some differences over who will be the next Fed chair between respondents and prediction markets. While Blackrock’s Rick Rieder leads in the prediction markets, 50% of respondents expect former Fed Governor Kevin Warsh to be tapped for the job by Trump. The prospect that Warsh will be named leads forecasters to feel more optimistic that the next Fed chair will run policy independently of the White House, even while he’s seen as more dovish than Fed Chair Powell.
Conclusion
In conclusion, the survey suggests that the economy will experience modest growth and low inflation in the next two years, with the funds rate settling around 3%. While there are risks and concerns, including uncertainty around the Trump administration’s actions and policies, the majority of respondents believe that the next Fed chair will run policy independently of the White House. Overall, the outlook is positive, with the economy gaining momentum from capital spending and a strong consumer, but it is essential to monitor the potential risks and concerns that could impact the economy in the future.
