Powell saw a slow rise in prices after May and June of front loading

(Bloomberg) — Federal Reserve Chairman Jerome Powell is likely to slow the pace of interest rate increases after the front-loading policy with a half-point hike next week and in June, economists polled by Bloomberg said.

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They expect the FOMC to raise its benchmark price by 50 basis points at its May 3-4 meeting, do so again in June — the first hikes of that magnitude since 2000 — and then turn into a quarter-point streak. It moves during the second half of the year. The US central bank will also start reducing its balance sheet of $9 trillion in May.

The poll of 48 economists, conducted April 22-27, expected the Fed to raise rates to the target range of 2.25% to 2.5% by December, while pricing markets around 2.75% at the end of the year. The latest forecast published by the Fed in March showed rates rising to 1.9% this year and 2.8% in 2023. Economists see Fed rates peaking at 2.88% in December 2023.

The path set by the consensus of economists is much less aggressive than that set by some forecasters such as Nomura Holdings Inc. , which expects a 75 basis point rise at both the June and July meetings. The most hawkish Fed official, James Bullard, president of the St. Louis Fed, has called for rates between 3% and 3.25% this year and said a 3.5% rate would be justified.

“As much as this Fed says it will be aggressive, Chairman Powell still appears to be more conservative than other members,” said Joel Naroff, president of Naroff Economics LLC, in response to the survey. It is looking for a height of one or a half points to start.

The overwhelming consensus among economists for a 50 basis point hike in May is not surprising, after Powell blessed such a move. “I would say 50 basis points will be on the table for the May meeting,” he announced on April 21, before officials entered the pre-meeting blackout period. This sentiment was echoed by many of his colleagues.

What Bloomberg Says About Economics…

Comments from Fed Chair Jerome Powell and others at Fedspeak ahead of the FOMC blackout suggested that a 50 basis point rate hike was in the cards at the May meeting. Most members of the committee appear to be in favor of “urgently” raising the fed funds rates to neutral – which the average FOMC member currently estimates at 2.4% – and we interpret that to mean by the end of the year.”

– Anna Wong, Yelena Chulyateva, Andrew Hosby and Elisa Winger (Economists)

To read the full note, click here

The vast majority of economists polled noticed little appetite for a 75 basis point hike, which the Fed last offered when Alan Greenspan was president in 1994.

“I expect the Fed to return to more calm” after an initial increase of half a point or more, as the economy slows, said Thomas Koesterge, chief US economist at Pictet Wealth Management. “Financial conditions are contracting faster than the Fed realizes, in my opinion, and there will be a significant impact on the economy in the second half of the year.”

The Fed is sure to announce its plans to let maturing securities run through, which is another way to tighten monetary policy. The Federal Open Market Committee has set plans for maximum monthly reductions of $60 billion in Treasuries and $35 billion in mortgage-backed securities. Economists expect the run-off to begin in May, with cuts of $20 billion in Treasuries and $15 billion in MBS, reaching a three-month maximum.

The vast majority expect officials to resort to direct selling to Mohammed bin Salman, in line with their stated preference for holding Treasury bonds only for the long term. There is a range of opinions on when the sale will start, with a slight majority seeing it starting this year.

Powell emphasized that the Fed would be smart in its interest rate hike plans and that the FOMC in its previous statement provided only loose guidance that continued increases would be appropriate. Four-fifths of economists expect the committee to repeat the guidance, while the rest say there may be a signal to consider one or more half-point steps.

Economists see the risks of a recession, with one-third seeing the possibility of a downturn within the next two years while the rest believe Powell and his colleagues will be able to avoid a downturn. Powell said their goal is to make a soft landing – a slower US economy with a still-strong labor market and inflation falling to the central bank’s target of around 2%.

“The economy is likely to enter a growth slump if not a full-blown stagnation, where growth is too weak to keep unemployment low,” said Diane Sonk, chief economist at Grant Thornton LLP. “It’s hard to see how to get the labor market on a more sustainable path in the long run without a fairly sharp drop in demand for workers.”

Wall Street economists recently raised more concerns, with Goldman Sachs Group estimating the chances of a contraction at around 35% over the next two years, while Deutsche Bank predicted a major recession with the unemployment rate rising several points. Bloomberg Economics’ recession probability model estimated that there is a 44% chance of a recession before January 2024.

To balance this risk, the Fed may stop raising interest rates even as inflation rises somewhat above its target, in the view of economists. The FOMC will likely carry a rate of about 2.5%, in the median forecast.

Economists generally believe that the Fed will get the monetary policy right. If they are setting policy, they say they will raise rates by half a point in each of the next two meetings with the target rate peaking at 3% in December 2023 – very close to what they expect from the central bank.

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