Qatar National Bank (QNB) has cautioned that upcoming U.S. Federal Reserve policy decisions could usher in a period of mild stagflation, marked by slowing economic growth alongside inflation that remains above the central bank’s 2% target.
In its latest weekly economic report, QNB noted that the Biden administration has repeatedly pressed the Fed to deliver substantial rate cuts and adopt a looser stance on monetary policy. Traditionally, however, interest-rate moves are guided by forecasts of economic indicators and in-depth analysis carried out by the Federal Open Market Committee (FOMC) without political interference.
The bank said recent trends have rattled financial markets, producing sharp volatility as investors attempt to gauge the appropriate path for interest rates. Treasury yields, particularly the real yield curve — measured by the spread between 10-year and two-year Treasury Inflation-Protected Securities — have provided a key signal. A widening of this gap in 2025, QNB explained, reflects expectations of weaker near-term growth while longer-term prospects remain steady.
Labor market data has reinforced these concerns, showing slower job creation and a gradual uptick in unemployment over recent months. Forecasts for U.S. GDP growth have also been revised downwards, with consensus estimates now at 1.5% for 2025 and 1.7% for 2026. These would represent the weakest annual growth rates since the post-pandemic downturn.
QNB stressed that real interest rates remain restrictive. With the federal funds rate ceiling at 4.5% and inflation hovering near 2.7%, the real policy rate is roughly 1.8% — significantly above the neutral range of 0.5% to 1%. “Current rates are overly tight and risk deepening the slowdown,” the report stated.
Short-term bond markets have mirrored expectations of looser policy ahead. The yield on the two-year U.S. Treasury has dropped about 60 basis points since January, from 4.40% to around 3.80%. Investors are now pricing in two quarter-point Fed cuts before the end of 2025, with further reductions expected through 2026 that could lower the policy rate to approximately 3%.
QNB concluded that these conditions point toward a moderate stagflationary environment in the coming years, with inflation persisting above target even as growth slows. Members of the FOMC, the report added, have already acknowledged that risks are shifting toward weaker activity, paving the way for a gradual easing cycle.
