Written by Prirana Bhatt and Indradeep Ghosh
BENGALURU (Reuters) – The Federal Reserve will introduce another 75 basis point rate increase in July, followed by a half percentage point increase in September, and will not roll back to quarter point moves until November in November. Soon, according to economists surveyed by Reuters.
Last week, the Federal Reserve raised the federal funds rate by three-quarters of a percentage point, its largest increase since 1994, after official data just a few days ago showed inflation rose unexpectedly despite expectations that it had peaked.
The latest poll results, released Wednesday before Federal Reserve Chairman Jerome Powell appears before the Senate Banking Committee as part of his twice-yearly testimony on monetary policy to Congress, show that momentum remains behind the US central bank’s doing more, not less, Despite mounting recession fears and heavy selling in the financial markets. Bond yields are up sharply and Wall Street’s major stock indexes are already trading in a bear market, which is defined as 20% below their peak.
In a Reuters poll from June 17-21, nearly three-quarters of economists, 67 out of 91, expected another 75 basis points increase in the US interest rate in July. This will bring the fed funds rate to a range of 2.25%-2.50%, which is roughly the neutral level where the Fed estimates that the economy is neither stimulating nor constraining.
The vast majority of the central bank expects to raise rates by another 50 basis points in September, with more divided opinion on whether to raise by 25 or 50 basis points in November. A majority expects the Fed to raise interest rates by 25 basis points at its December meeting.
That will bring the fed funds rate to a range of 3.25%-3.50% by the end of this year, 75 basis points higher than thought in a poll published just two weeks ago.
Powell indicated last week that a pause in the current tightening cycle would only be possible after a significant reduction in inflation, which currently appears to be a much more remote possibility than was thought just a few weeks ago.
Philip Marie, Rabobank’s chief US strategist, wrote, “Since the Fed continues to downplay the inflation problem … unaware that the wage-price spiral has already begun, we expect that they will have to raise interest rates faster than they now expect “. in a note.
“Unfortunately, the walking path will also likely follow a slump.”
Graphic: Reuters Poll – US Economy and Federal Funds Price Forecast – https://fingfx.thomsonreuters.com/gfx/polling/egvbkgazjpq/Reuters%20Poll-%20US%20economy%20and%20Fed%20rate%20outlook.PNG
Inflation will remain above the Fed’s 2% target until at least 2025, according to its own forecasts and a separate Reuters poll. [ECILT/US]
Although the Fed was expected to shift rates by 25 basis points in November, a large minority, around 40%, expected a 50 basis point hike at that month’s meeting. Very few have said that the Fed will stop raising interest rates sometime this year.
About three-quarters of respondents, 68 of 91, saw the year-end rate at 3.25%-3.50% or higher, in line with the Federal Reserve’s “point chart” showing policy makers’ expectations.
Strict interest rate increases come with their own risks, as evidenced by the Federal Reserve’s economic outlook where expectations for the US unemployment rate have been raised significantly and economic growth has been expected to be below trend.
The poll forecast only one 25 basis point increase in the first quarter of next year, pushing the Fed rate to 3.50%-3.75%, the likely final rate.
The Fed was expected to pause in the second and third quarters of 2023 and cut interest rates by 25 basis points in the fourth quarter of next year, according to median forecasts from a smaller sample. But expectations of where the Fed funds rate will be by the end of 2023 ranged between 2.50%-2.75% and 4.25%-4.50%, underlining the heightened uncertainty.
Although Powell said the Fed was not trying to trigger a recession, some major dealers either started anticipating a recession early this year or made their calls for a recession.
(Reporting by Prirana Bhatt and Indradeep Ghosh; Poll by Swathi Nair and Suzubhan Sarkar; Editing by Paul Simaw)