QNB Warns Of Mild US Stagflation Due To Federal Reserve Rates

Post by : Mumtaaz Qadiri

Qatar National Bank (QNB) has warned that upcoming interest-rate decisions by the US Federal Reserve could lead to mild stagflation. Stagflation is a situation where economic growth slows while inflation remains above the target level. According to QNB, this scenario could occur if growth continues to weaken while prices stay high.

Focus On US Monetary Policy

In its weekly report, QNB explained that the current US administration has been closely watching monetary policy. The government has urged the Federal Reserve to make significant interest-rate cuts and adopt a more flexible approach. Normally, the Federal Reserve decides on rates based on careful forecasts of key economic indicators, including growth, inflation, and employment. The report emphasized that these decisions are usually made through technical discussions by the Federal Open Market Committee (FOMC) without political interference.

Market Volatility And Economic Trends

The bank highlighted that new economic developments have caused uncertainty in financial markets. Investors are trying to figure out the right level of interest rates to value assets in this changing economic environment. This uncertainty has led to high volatility in the markets, making it challenging to predict economic trends accurately.

US Interest Rates And Treasury Yields

QNB noted that US interest rates and Treasury yields provide key information about the economy. In particular, the real yield curve—the difference between the yields on 10-year and 2-year Treasury Inflation-Protected Securities (TIPS)—is an important indicator. A wider gap in this curve generally signals expectations of slower near-term growth compared to long-term growth.

Widening Yield Gap Indicates Slow Growth

In 2025, the gap between the 10-year and 2-year real yields has widened. While long-term yields have stayed stable, the increase in the gap suggests that long-term growth expectations have not changed much, but near-term activity is expected to weaken. Recent labor-market data supports this view, showing slower job creation and a gradual rise in unemployment in recent months.

Downward GDP Forecasts

Consensus forecasts for real GDP growth have also been reduced. QNB reported that growth expectations for 2025 and 2026 have been lowered by around 0.5 percentage points, to 1.5% and 1.7% respectively. These levels are close to the weakest annual growth since the post-COVID recession. This decline reflects the slowing pace of economic activity in the US.

Real Interest Rates Remain Restrictive

QNB pointed out that real interest rates in the US are still highly restrictive. With the federal funds rate at an upper bound of 4.5% and inflation at about 2.7%, the real rate is approximately 1.8%, which is above the estimated neutral rate of 0.5% to 1%. The bank argued that current rates are too high and may need adjustment to prevent a sharp slowdown in growth.

Treasury Yields Track Fed Expectations

Short-term Treasury yields closely follow market expectations for Federal Reserve policy. The two-year Treasury yield has fallen about 60 basis points this year, dropping from a January peak of 4.40% to roughly 3.80%. This decline reflects market expectations that the Fed will cut rates significantly in the coming months.

Expected Rate Cuts

Markets now anticipate two 25-basis-point cuts by the end of 2025, followed by additional reductions through 2026. These adjustments could bring the federal funds rate down to around 3% by the end of 2026. Such a policy-easing cycle is aimed at supporting economic growth while managing inflation.

Indicators Of Stagflation

QNB concluded that these trends point to a moderate stagflation environment in the US. Inflation is expected to stay above the Fed’s 2% target even as economic growth slows. The Federal Open Market Committee members have acknowledged a shift in risks toward slower growth, which is reflected in market expectations for upcoming rate cuts.

Impact On Financial Markets

The possibility of stagflation has unsettled financial markets. Investors are adjusting their portfolios and pricing strategies in anticipation of slower growth and persistent inflation. Treasury yields, bond prices, and stock markets are all being influenced by expectations of Federal Reserve policy and its effect on economic activity.

Broader Economic Implications

If stagflation develops, it could have wider implications for the global economy. Slower growth in the US may affect international trade, investment flows, and currency markets. Persistent inflation could also influence global commodity prices and interest rates in other countries, creating challenges for central banks worldwide.

Balancing Inflation And Growth

The Federal Reserve faces the challenge of balancing inflation and growth. While the goal is to lower inflation toward the 2% target, it also needs to avoid triggering a sharp economic slowdown. According to QNB, carefully timed rate cuts and policy adjustments will be critical to navigating this situation without worsening stagflation.

Outlook For 2025–2026

Looking ahead, QNB expects the US economy to grow slowly while inflation remains above target. Policy easing by the Fed could help support growth, but real interest rates and market expectations will continue to shape economic outcomes. Investors and policymakers will closely monitor labor-market data, Treasury yields, and inflation reports to guide future decisions.

A Moderate Stagflation Scenario

QNB’s analysis suggests that the US may face mild stagflation in the near term. Growth is slowing, inflation remains above target, and financial markets are reacting to changes in policy expectations. Rate cuts expected from the Federal Reserve may ease some pressure, but careful monitoring of economic indicators will be necessary to navigate this challenging environment.

US interest rates, Federal Reserve policy, Stagflation economic forecast