By Indradip Ghosh
BENGALURU, July 21 (Reuters) - The Federal Reserve will keep its key interest rate steady for the rest of 2026 to tackle a five-year-long inflation problem, according to the median forecasts of economists in a Reuters poll.
A majority of those who answered a separate question about the chance of a rate hike this year now described the likelihood as "high", a reversal from last month when most saw it as "low".
Markets are pricing in two rate rises by end-March next year as a recent
near-25% surge in oil prices following a renewed escalation of the Middle East war raises the risk last month's moderation in inflation, still running at about double the Fed's 2% target, may prove short-lived.
Fed Chairman Kevin Warsh reiterated last week his focus was bringing inflation back to target, a goal the Fed has failed to achieve for more than five years. He has offered scant details on how he intends to get there.
While some policymakers have opened the door to higher rates if inflation remains elevated, most economists in the July 17 to 21 Reuters poll were not yet convinced.
All 104 forecasters expected the Fed to leave borrowing costs unchanged at the 3.50%-3.75% range at its July 28 to 29 meeting.
A three-fourths majority, 78, also saw no change through year-end. While the number seeing no change in 2026 was the same as in a late-June survey, most of those who did expect a change now predicted at least one rate increase this year, while only six saw cuts, until recently the consensus.
"We do have people who expect Warsh could tighten relatively early in his tenure. We think he's more playing for time and trying to jawbone markets to assume he will be credible, but will actually prefer not to have to tighten rates," said Jeremy Schwartz, senior U.S. economist at Nomura.
"We see a lot of the areas Warsh is focusing on seem like the types of things you'd be talking about if you were building the case to stay on hold."
HIKE LIKELIHOOD HIGH
A 66% majority of respondents, 44 of 67 who answered a separate question, said the chance of a rate hike was high. Last month, 47 of 86 who answered that question saw it as low.
"If you're really serious about a return to 2% inflation then the time for hiking rates is kind of approaching," said Jan Groen, chief U.S. economist at Societe Generale, who expects no change this year.
"There's a big contingent who still thinks just staying put for a long time will slowly grind down spending in the economy, and then over time, we will get a return to 2%. That has been the playbook for at least two to three years and that playbook has kind of failed, more or less."
High living costs remain a political vulnerability for President Donald Trump ahead of November's midterm elections. Trump partly secured his 2024 election win on pledges to curb inflation, even promising to lower prices.
The interest rate will not rise through 2028, although the Fed's preferred inflation measure — the Personal Consumption Expenditures Price Index, last measured at 4.1% in May — was seen remaining above target throughout that period, according to poll medians.
"Warsh has really insisted on 2% as the target...Then again, it's hard to know what anyone's motivations are. But we all saw what happened in the nomination process," added Nomura's Schwartz.
"It's hard to forget when we're thinking about what might be driving policy when you do get these close calls."
Meanwhile, unemployment was seen hovering around 4.2% and economic growth averaging roughly 2%, suggesting neither is likely to prevent the Fed from hiking if inflation forces its hand.
Future policy will also depend on recommendations from Warsh's newly installed task forces comprising a group of well-known economists, corporate executives and central bankers.
"We conclude that the communications and balance sheet task forces are likely to see the most tangible results that could be implemented near term, while the inflation task force could have the most lasting impact on the conduct of monetary policy over the medium term," noted economists at JPMorgan.
(Other stories from the Reuters global economic poll)
(Reporting by Indradip Ghosh; Polling by Nushaiba Iqbal; Editing by Jonathan Cable, Ross Finley, Peter Graff)
