Priors: Fed Expected to React More "Dovishly" to Economic Data, Potential Rate Cuts of 2-3 Times in Second Half

P. Rowe Price’s Chief U.S. Economist Blerina Uruci states that the U.S. economy is currently influenced by multiple factors, affecting both inflation and demand. Overall, these factors support the Federal Reserve maintaining its current monetary policy in upcoming meetings to assess the impact of rising energy prices on the economy and the effects of the more accommodative financial environment since last year. Additionally, despite a downward trend in employment growth over recent quarters, the unemployment rate has remained relatively stable, indicating that some slowdown may be structural rather than a cyclical sign of a sharp weakening labor market. This also supports the Fed’s decision to hold steady for now and observe how these intertwined economic factors develop.

He mentioned that the latest employment data showed a significant decline. The January employment report may have overestimated the strength of the economy, while the February report could have exaggerated the weakness to some extent. Overall, the unemployment rate has remained stable since the third quarter of last year. Furthermore, the U.S. economy is influenced by several factors, including inflation risks from rising energy prices and a positive outlook supported by growth in consumer spending and capital expenditures. However, the slowdown in job growth paves the way for the Fed to adopt a more dovish stance in the second half of 2026. If oil prices decline in the coming weeks, overall interest rates are likely to gradually trend downward.

He expects that the likelihood of the Fed cutting interest rates in March is low, as January’s personal consumption expenditure inflation data may be temporarily strong, and the Federal Open Market Committee (FOMC) needs to balance risks between its dual mandates. Looking ahead, the firm anticipates the Fed will become more dovish in response to economic data in the second half of this year. He projects that there could be 2 to 3 rate cuts in the second half, exceeding the current market expectation of 1 to 2 cuts. Over the next 12 months, a total of 3 to 4 rate cuts is also possible, indicating a more accommodative stance than the market currently anticipates.