NextFin News - A coalition of leading economists has sharply revised U.S. inflation forecasts upward, effectively dismantling expectations for a Federal Reserve interest rate cut in the near term as the economic fallout from the U.S.-Israel conflict with Iran intensifies. The shift in sentiment follows a persistent spike in energy costs and a realization that the geopolitical shock is embedding itself into the broader price index more deeply than initially anticipated.
The consensus among forecasters surveyed by Bloomberg now suggests that the Consumer Price Index (CPI) will remain stubbornly above the Federal Reserve's 2% target well into 2027. This recalibration is driven primarily by the "oil shock" triggered by the Middle Eastern hostilities, which has pushed gasoline prices to their highest levels since 2024. Market data as of May 22, 2026, shows WTI crude oil trading near $98.93 per barrel, a level that continues to exert upward pressure on logistics and manufacturing costs across the domestic economy.
Jan Hatzius, chief economist at Goldman Sachs, noted in a recent "Global Views" report that while the labor market shows signs of cooling—with underlying job growth estimated at a modest 39,000—the inflationary risks now outweigh the benefits of immediate monetary easing. Hatzius, known for his historically optimistic "soft landing" stance, has adjusted his outlook to reflect a more cautious Federal Reserve. He suggests that while growth may accelerate to 2-2.5% in 2026 due to potential tax cuts and reduced tariff impacts under U.S. President Trump, the path to lower rates has become significantly more obstructed.
The Federal Reserve itself has signaled a "wait and see" approach. U.S. President Trump’s administration has faced a complex balancing act as the central bank held interest rates steady in the 3.5%-3.75% range. Federal Reserve Chair Jerome Powell, speaking recently at Harvard University, characterized the current policy as being in a "good place" to observe the war's full impact. Powell’s rhetoric suggests that the central bank is prepared to hold rates at these elevated levels for the remainder of 2026 if the inflation trajectory does not decisively turn downward.
However, this hawkish tilt is not without its detractors. Some analysts argue that the Fed risks over-tightening into a slowing economy. While the majority of economists have pushed out their rate-cut timelines, a minority view persists that the cooling labor market will eventually force the Fed's hand. Goldman Sachs Research, for instance, maintains that the chances of the fed funds rate falling further than currently forecasted remain significant if economic growth falters under the weight of high borrowing costs and energy-driven margin compression.
The current inflationary environment is further complicated by the lingering effects of trade policies. Powell specifically cited concerns that the U.S. has not yet fully absorbed the price rises triggered by tariffs implemented by U.S. President Trump last year. When combined with the immediate pressure of $100-per-barrel oil, these structural costs create a "sticky" inflation profile that makes the traditional 2% target appear increasingly elusive. For now, the "higher for longer" mantra has transitioned from a theoretical risk to the baseline assumption for the American economy.
Explore more exclusive insights at nextfin.ai.
