As inflation continues to dominate the headlines, economists at Wolters Kluwer have changed their tune about when the Federal Open Market Committee will next cut short-term rates.
While the Fed's actions do not directly affect mortgage rates, investors price expectations about where the economy is heading into the 10-year Treasury yield, one of the benchmarks for residential real estate loans.
Few on Wolters Kluwer's February Blue Chip Economic Indicators panel now believe the next FOMC rate cut will take place at its March meeting, only 10%, compared with
Instead, 15% of those surveyed now believe the next reduction will be in May. Approximately half think it will take place at the June meeting while 23% responded that it would happen later than that.
The group is also more pessimistic about the size of the reduction overall this year. The consensus average is for a 49-basis-point cut this year, compared with the 63 basis points predicted in January,
Panelists were unanimous that no matter when the next incremental cut occurred, it would be just 25 basis points.
For February, the economists that participated in the panel forecasted a 10-basis-point cut in the 10-year yield to an average of 4.4%, falling to 4.2% one year later.
This survey was conducted on Feb. 4 and 5; on the first day, the 10-year closed at 4.51%.
As of 11:30 a.m. eastern time on Feb. 10, the 10-year was at 4.48%, after Friday's close at 4.49%.
"The rise in long-term rates reversed course in mid-January, apparently reflecting, among other things, a move to the relative safety of government debt in response to increasing uncertainty surrounding U.S. trade relationships," the Wolters Kluwer report said.
Inflation, as measured by the Personal Consumption Expenditures index, is
Their concern is about
"While the imposition of a tariff need not cause sustained higher inflation as it is a one-time price increase, it could boost inflation expectations in an economy that has just experienced the fastest inflation in more than 40 years," the report said. "Consequently, rekindled inflation expectations could turn a one-off price increase into another round of ongoing inflation."
When questioned about the impact of tariffs, 80% of the Wolters Kluwer panel thought they would provide "a significant boost" for inflation. Just under half now believe inflation could meaningfully reaccelerate over the next six months.
The economists are also meh on gross domestic product growth, expecting a continuation of the fourth quarter's slowdown, when the rate was 2.3%.
The panel's consensus view "looks for relatively steady, near potential GDP growth of around 2% at an annual rate per quarter over the entire forecast horizon," Wolters Kluwer said.
However, analysts at Bank of America Global Research stated that increased economic policy uncertainty translates to lower bond yields.
The weekly report from Chris Flanagan and Henry Navarrete Brooks, cites new Treasury Secretary Scott Bessent's remarks that
"This of course makes sense to us in the context of addressing the problem of elevated U.S. public debt," Flanagan and Brooks wrote. "In our view, we learned this week that heightened policy uncertainty related to tariffs can help achieve that goal of lower bond yields."
They called policy uncertainty to be "more feature than bug for the new administration." Their target is a 3.6% 10-year Treasury yield at some point in 2025. To achieve it would, however, lead to lower GDP growth in the next year or two.
"The key will likely be to engineer just a growth slowdown rather than recession and to be sure growth has turned higher heading into the 2026 election," the B of A report said.
Flanagan and Brooks compared it to the 1982 recession under President Reagan and the 1995 slowdown related to the Newt Gingrich-led "
