The International Monetary Fund has warned that US Federal Reserve policymakers have minimal flexibility to cut interest rates this year, despite inflation showing signs of cooling. The Washington-based institution projects that US inflation will return to the Fed's 2% target by the first half of 2027, but the path to get there leaves little room for monetary easing in 2025.

This assessment comes as markets have been pricing in potential rate cuts, with some investors hoping the Fed might begin loosening monetary policy as early as this year. The IMF's analysis suggests such expectations may be premature, given the central bank's need to maintain restrictive policy to ensure inflation continues its downward trajectory. The fund's projections indicate that while inflation is moving in the right direction, the journey back to target levels remains a multi-year process.

The IMF's stance underscores the delicate balance facing Federal Reserve Chair Jerome Powell and his colleagues as they navigate between supporting economic growth and keeping inflation under control. With inflation still above target and wage pressures persisting in certain sectors, the central bank appears committed to maintaining higher rates for longer than some market participants had anticipated.