With the jobless rate nearing a record high, inflation at its highest in four decades, and soaring global commodity prices set to persist, most analysts believe the Fed needs to act quickly to keep price pressures under control.
The latest Reuters poll of more than 100 economists from April 4-8 predicts two half-point rate hikes this year, the first since 1994, taking the federal funds rate to 1.25%-1.50% d ‘here is the June meeting.
The year-end forecasts of the Reuters poll in March are thus advanced by at least three months and are more in line with the prices of interest rate futures.
A strong majority, 85 out of 102 economists, expected 50 basis points in May, and a still strong majority of 56 said the Fed would follow with 50 basis points also in June.
“Given the evolution of official comments and the inflationary pressures visible throughout the economy, we believe the Fed will proceed with interest rate hikes of half a point at policy meetings in May, June and July,” said James Knightley, chief international economist at ING.
While the central bank, chaired by Jerome Powell, is likely to make quarter-point moves in the second half of this year, the federal funds rate is now expected to end 2022 at 2.00%-2 .25%, or 50 basis points more than the median forecast of a poll carried out last month.
Going so fast with interest rates, especially in an economy that has grown accustomed to very low borrowing costs for many years, carries risks.
As the Fed appears to feel the need to “catch up” to regain control of inflation and inflation expectations, a rapid pace of aggressive interest rate hikes increases the risks of a policy error that could could be enough to tip the economy into recession,” Knightley added.
RAPID SLOWDOWN
Indeed, respondents to a supplemental question gave a one-in-four median chance of a US recession in the coming year, with that chance rising to 40% over the next 24 months. The bond market is already showing signs of concern about the recession. [US/INT]
This partly explains the rapid slowdown in the pace of rate hikes next year, which will be just 50 basis points cumulatively, according to the Reuters poll, which will take the federal funds rate to 2.50%-2.75 % by the end of 2023.
Some economists are already predicting a rate cut from the fourth quarter of next year.
Yet, despite expectations of an aggressive policy-tightening path, inflation is not seen falling to the Fed’s 2% target until at least 2024.
The war between Russia and Ukraine, which has sent commodity and energy prices skyrocketing, also makes it harder to predict when inflation will eventually come down.
Inflation, as measured by the consumer price index (CPI), is expected to have peaked at 7.9% last quarter and averaged 6.8% this year, representing a sharp improvement from 6.1% in last month’s survey.
The US labor market is expected to continue to tighten after the unemployment rate fell to 3.6% last month, which is only slightly above pre-pandemic levels and the average expected in 2022.
The jobless rate is expected to average 3.5% next year and remain at that level in 2024, roughly in line with the Fed’s own optimistic view and not in line with respondents’ fears of recession .
Growth forecasts have been revised downwards in all areas. The economy is expected to grow 3.3% and 2.2% this year and next year respectively, compared to 3.6% and 2.4% forecast last month.
(For more articles on the Reuters World Economic Survey:)