Will the Fed’s lower bound reach 2.5% or lower before 2027?

Fed signals no cuts in 2026 amid sticky inflation, making a drop to 2.5% by year-end 2026 nearly impossible. Markets price 94% NO.

What’s Happening

The U.S. Federal Reserve has held the federal funds rate in a range of 3.50%-3.75% since December 2025, with most economists polled now pushing rate-cut calls into 2027 as war-driven inflation pressures persist. Less than half of economists surveyed see the policy rate falling this year, marking a significant repricing from earlier 2026 forecasts that had penciled in multiple cuts. For the Fed's lower bound reach 2.5% or lower before 2027, the Federal Open Market Committee would need to deliver at least four consecutive 25-basis-point cuts from current levels — a pace not seen outside recessionary cycles. Treasury Secretary Scott Bessent warned last week to expect "one or two more hot inflation numbers" before any easing cycle could plausibly begin. [Kitco, May 19]

Kevin Warsh was sworn in as Federal Reserve Chair on May 22, 2026, replacing Jerome Powell after President Trump publicly labeled the outgoing chair a "major loser" for refusing to cut rates aggressively. Despite expectations Warsh would deliver dovish policy, markets are now pricing a rate hike this year as more likely than a cut, reflecting persistent inflation prints above the 2% target. Asked Tuesday whether Warsh would meet his demands for lower rates, Trump responded: "I'm going to let him do what he wants to do." Mortgage rates have remained stubbornly above 6% throughout Trump's second term, frustrating his campaign vow to drive borrowing costs to 3%. [Axios, May 20]

Veteran strategist Ed Yardeni stunned Wall Street with a forecast that the Fed could resume hiking before easing, citing tariff pass-through and a tight labor market reminiscent of the 1979 stagflation episode that forced Paul Volcker to push the funds rate above 19%. Historical precedent shows the FOMC has only cut 125+ basis points within 18 months during recessions — 2001, 2007-08, and 2020 — making the Fed's lower bound reach 2.5% or lower contingent on a sharp growth deterioration not currently visible in GDP or payrolls data. Hoover Institution fellow John Cochrane wrote that Warsh is "caught between Trump and the ghosts of 1979," underscoring the institutional pressure against premature easing. The next FOMC decision lands in June, with the SEP dot plot likely to set the tone for whether the Fed's lower bound reach 2.5% remains mathematically plausible by year-end 2026. [WaPo, May 20]

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