by Indradip Ghosh and Prerana Bhat
BANGALORE (Reuters) – The Federal Reserve is expected to announce two consecutive half-point rate hikes in May and then June to curb inflation, economists polled by Reuters estimate a 40% chance of a recession in the United States next year.
Faced with unemployment falling to an all-time low, inflation at its highest in 40 years and the obviously lasting boom in energy and commodity prices, most observers believe that the American central bank must act quickly to limit price pressures.
The survey carried out between April 4 and 8 among more than 100 economists forecasts two increases of 50 basis points in the rate of federal funds (“fed funds”), a first since 1994, which would bring it to 1.25% -1.50% at the end of the June monetary policy meeting.
This level would thus be reached at least three months ahead of the March survey estimates.
A large majority (85 out of 102) of economists said they were counting on a 50 basis point rise in May and 56 of them on an equivalent rise in June. And the Fed might not stop there, some add.
“Given the evolution of the official rhetoric and the inflationary pressures seen in the economy, we expect the Fed to announce half-point rate hikes at the May, June and July meetings,” James said. Knightley, ING’s chief international economist.
The US central bank could then return to quarter-point increases in the second half of the year, which would bring the “fed funds” rate to 2.00%-2.25% at the end of the year, i.e. 50 basis points above the median of the March survey forecast.
INFLATION WILL NOT RETURN TO 2% BEFORE 2024
However, such a rapid tightening would not be without risks, some economists point out.
“Since the Fed appears to believe it needs to ‘catch up’ to regain control of inflation and inflation expectations, a heavy fire of rate hikes increases the likelihood of a monetary policy error that could be enough tip the economy into recession,” said James Knightley.
Economists who answered a question on the subject estimate the probability of a recession in the United States at 25% within a year and at 40% the same risk over a two-year horizon.
This partly explains why they expect a sharp slowdown in rate hikes in 2023, to 50 basis points in total over the year, which would bring the “fed funds” rate to 2.50%-2.75 %. And some are already predicting a rate cut as early as the fourth quarter of next year.
Despite the looming rapid tightening, US inflation is unlikely to return to the Fed’s 2% target until 2024.
It is expected to have peaked at 7.9% in the first quarter of this year and to average 6.8% for the whole of this year, 0.7 points higher than forecast last month.
The unemployment rate is expected to return to 3.5% next year on average and remain stable in 2024.
Economists have however revised their growth forecasts downwards and are now counting on an increase in gross domestic product (GDP) of 3.3% this year and 2.2% next year, against 3.6% and 2, 4% respectively last month.
(Prerana Bhat and Indradip Ghosh report, French version Marc Angrand, edited by Jean-Michel Bélot)