IMF expects limited room for the Federal Reserve to cut interest rates this year, maintaining the outlook for U.S. growth unchanged

The International Monetary Fund (IMF) said that even though U.S. inflation is expected to ease back to the Federal Reserve’s 2% target in the first half of 2027, policymakers this year have little room to cut rates.

Based on the IMF’s annual review of the U.S. economy from its headquarters in Washington, D.C., under the Article IV consultation, the fund’s staff expects the Fed to cut rates only once by the end of this year. “Overall, staff believes there is limited scope for lowering policy interest rates over the next year.”

In a statement, IMF staff said: “More substantial monetary easing needs to be predicated on a clearly worsening outlook for the labor market, while inflation pressures must not rise, including because short-term inflation expectations could move up as a result of higher oil prices and increases in commodity prices.”

In another statement, an IMF executive director said that, given that the Fed’s current policy stance is close to neutral, “there is limited room for rate cuts in 2026—especially if rising energy prices may feed through to core inflation, and risks of further increases in global commodity prices could further delay a return of inflation to the target.”

Under the IMF staff’s baseline outlook, the Fed’s benchmark interest rate will fall to 3.25% to 3.5% by year-end. By the first half of 2027, “this will bring the economy back to full employment and deliver 2% inflation,” the IMF said.

U.S. Tariffs

The full version of the Article IV consultation report was released on Thursday; previously, the IMF had published a summary in February. Because the assessment of the U.S. economy was completed before the U.S. launched strikes against Iran alongside Israel on February 28, it did not provide a comprehensive assessment of the conflict in the Middle East. However, the IMF did say that the war could “further spur U.S. energy production.”

The IMF maintained its forecast for the U.S. economy, expecting GDP growth of 2.4% in 2026, supported by fiscal policy and lower policy interest rates. It expects economic growth to slow to 2.1% in 2027.

When discussing U.S. President Donald Trump’s move to raise import tariffs, the IMF said, “There is evidence that these tariffs are currently largely borne by U.S. businesses, and secondarily by consumers.” The IMF assumes that the average effective tariff rate is about 7% to 8.5%.

IMF staff added: “Taking into account the costs and time required to reshape supply chains under these tariff conditions, the negative impact on economic growth may be most significant in the short term, but it is expected to persist.”

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