QNB Highlights Potential Stagflation Scenario for US Economy

Qatar National Bank (QNB) predicted that upcoming US Federal Reserve interest-rate decisions could lead to a mild stagflation scenario, where growth slows while inflation remains above target.

In its weekly report, QNB noted that the current US administration has clearly focused on monetary policy and has urged the Federal Reserve to deliver large rate cuts and adopt a more flexible stance.

 The report explained that monetary policy decisions are normally based on forecasts of key macroeconomic variables and a careful analysis of how interest-rate changes affect economic activity and prices, with the Federal Open Market Committee typically carrying out this process through extensive technical deliberations free from political pressure.

The bank observed that new economic trends has unsettled financial markets, causing significant volatility as investors try to determine the appropriate level of interest rates for pricing assets in the new macroeconomic environment.

 US interest rates and Treasury yields were said to provide important information on macroeconomic expectations, particularly through the real yield curve (the gap between yields on 10-year and 2-year Treasury Inflation-Protected Securities). A wider gap indicates expectations of weaker short-term growth relative to the long term.

This gap has widened in 2025 even though long-term real yields have remained stable, suggesting that longer-term growth expectations have not changed while near-term activity is expected to weaken.

 Recent US labor-market data were highlighted as evidence of this slowdown, showing slower job creation and a gradual rise in unemployment in recent months.

Consensus forecasts for real GDP growth have also been revised downward, with expectations for 2025 and 2026 reduced by about 0.5 percentage points to 1.5% and 1.7% respectively, levels approaching the weakest annual growth since the post-COVID recession.

The report stressed that real interest rates remain highly restrictive. With the federal funds rate upper bound at 4.5% and inflation at roughly 2.7%, the real rate is close to 1.8%, well above the estimated neutral rate of roughly 0.5-1.0 percentage points.

 QNB argued that current rates are overly tight and need adjustment to avoid a sharp growth slowdown.

Short-term Treasury yields were described as closely tracking market expectations for the Fed's policy path. 

The two-year Treasury yield has fallen about 60 basis points this year (from a January peak of 4.40% to roughly 3.80%) signaling expectations of a substantial rate-cutting cycle. 

Markets now anticipate two 25-basis-point cuts by the end of 2025, followed by additional reductions through 2026, which would bring the policy rate down to around 3% by the end of that year.

QNB concluded that these indicators point to a moderate stagflationary environment, with inflation staying above the Fed's 2% target even as growth weakens.

 Members of the Federal Open Market Committee were reported to have acknowledged a shift in the balance of risks toward slower growth, with markets expecting a policy-easing cycle that lowers the federal funds rate to roughly 3% by the end of 2026.