By Indradip Ghosh
BENGALURU, March 26 (Reuters) - The Federal Reserve will keep U.S. interest rates on hold until September, according to economists in a Reuters poll who are still clinging to expectations for at least one reduction later this year, despite worries about inflation from war in the Middle East.
Financial markets have priced out any chance of a cut this year and added nearly a 30% chance of a hike as the U.S.-Israel war with Iran, now in its fourth week, has pushed up crude oil prices
more than 40%.
Economists expect more limited and shorter-lived spillovers from the energy shock, even with inflation running about a full percentage point above the Fed’s 2% target before the war began and the U.S. 2-year Treasury note yield up over 55 basis points.
After holding rates steady in a 3.50%-3.75% range last week, a number of Fed officials signalled elevated inflation risks remain the top priority, suggesting the chances of a cut anytime soon are slim.
Nearly three-quarters of economists, 61 of 82, in the March 20-25 Reuters poll predicted the Fed would leave rates unchanged next quarter, compared to around two-thirds expecting a cut to 3.25%-3.50% range by end-June just two weeks ago.
Just over two-thirds of respondents - 55 of 82 - saw no reductions until at least September.
"It's going to take longer for the Fed to gain confidence inflation is returning to a trajectory that's consistent with its 2% target. We don't think that's going to happen until September," said Jonathan Millar, senior U.S. economist at Barclays. "It's entirely plausible the Fed waits out the oil price for longer and delays cuts into next year."
"I don't think this is a case where financial markets actually lead the Fed," Millar said, adding financial conditions have already been tightened without the Fed moving the funds rate.
Economists were split four ways on where rates would stand by end-2026, with views largely clustered around one (28) and two cuts (37).
While 13 expected no change this year, four forecast three reductions.
Last week's median dot-plot projections from Federal Open Market Committee members showed one reduction this year.
Of the 75 economists who participated in the latest survey and the one conducted before the March 17-18 policy meeting, a sizeable 45% minority - 34 - pushed their rate-cut expectations further out. Just over half left their forecasts unchanged.
U.S. President Donald Trump, who has nominated Kevin Warsh as the next Fed chair, has repeatedly attacked present Chair Jerome Powell for not cutting rates faster.
"Any chair that comes in and demands a large number of cuts is going to have a hard time finding consensus on that at least for this year," said Jan Groen, chief U.S. economist at Societe Generale.
"Everything related to the Iran war and the impact on the oil market is adding to the (inflation) worry."
Economists have sharply raised inflation forecasts in recent weeks, primarily for headline measures.
The Personal Consumption Expenditures (PCE) index - the Fed's preferred inflation measure - is expected to rise an annual 3.3%, 3.1% and 2.9% in the second, third and fourth quarters, respectively, broadly 50 basis points higher than forecasts from just two weeks ago.
Those forecasts were higher than the latest Fed projections.
(Other stories from the Reuters global economic poll)
(Reporting by Indradip Ghosh; Polling by Aman Kumar Soni and Mumal Rathore; Analysis by Sarupya Ganguly; Editing by Ross Finley and Chizu Nomiyama )
