They expect the Federal Open Market Committee to raise interest rates by half a percentage point in September and then switch to quarter-point increases at the remaining two meetings of the year. That would raise the upper limit of the Central Bank’s policy target to 3.5% by the end of 2022, the highest level since early 2008.
Fed policy bets are now favoring a 50 basis point hike in September as more likely than a 75 basis point hike, following weak US economic data earlier on Friday. The broader path envisioned by economists is slightly more hawkish than that suggested by market pricing.
It’s also steeper than expected before the June meeting, when the FOMC forecast rates to rise to 3.4% by the end of the year and 3.8% in 2023.
The increase of 75 basis points in June was the largest increase since 1994. Powell has said that either 50 or 75 basis points would be on the table at the Fed’s meeting on 26-27. July, although many policymakers’ comments were around 75 basis points. move. A survey of 44 economists conducted from July 15 to 20 predicts the Fed will raise interest rates by another 25 basis points in early 2023, peaking at 3.75% before pausing and starting to cut rates before the end of the year.
“A still strong labor market and robust consumer spending provide room for the Fed to continue raising interest rates quickly,” Oxford Economics chief economist Kathy Bostjancic said in the survey.
There is an overwhelming consensus that the FOMC will raise 75 basis points this month, with only one forecaster — Nomura Securities’ U.S. economics team — looking for a full percentage point hike. Federal Reserve Chairman Christopher Waller, one of the hawkish policymakers, has approved a 75 basis point move, and Atlanta President Raphael Bostic warned that too big a change would have negative effects.
What Bloomberg Economics Says…
“Bloomberg Economics believes a 75 basis point increase strikes the right balance.” The risk that inflation will rise is high. With Covid cases rising again and the war in Ukraine still raging, it’s likely we haven’t seen the last of the damaging supply shock. And with inflation expectations already on shaky grounds, the central bank needs to act proactively before expectations unravel.
— Anna Wong, Yelena Shulyatyeva, Andrew Husby and Eliza Winger
The central bank is seeking to cool economic demand in response to rising prices that have persisted for longer than expected and raised concerns that inflation expectations may be slipping. The consumer price index rose by 9.1% in June from a year earlier in a broad increase, the largest increase since 1981.
If the Fed delivers another 75 basis point hike next week, the combined increase of 150 basis points over June and July would represent the biggest increase in interest rates since the early 1980s when Paul Volcker was chairman and battling skyrocketing inflation. There is no appetite for full-point hikes at any point in this cycle, according to nearly all economists surveyed.
Economists expect the Fed to eventually increase its reduction in its balance sheet, which began in June with the expiration of maturing securities. The Fed is phasing it out to $1.1 trillion a year eventually. Economists project that the balance sheet will rise to $8.4 trillion by the end of the year and decline to $6.5 trillion by December 2024.
Most respondents say officials will resort to outright sales of mortgage-backed securities, in line with their stated preference to hold only Treasuries over the long term. Among those expecting a sale, there is a wide range of views on when the sale would begin, with most seeing it starting in 2023 or later.
At the July meeting, the FOMC’s statement is expected to maintain its rate guidance that promises continued increases, without a specific scope of adjustments.
Most economists expect one dissent at the meeting. Kansas City Fed President Esther George, who opposed a smaller hike at the last meeting, has warned that too quick a move in interest rates could undermine the central bank’s ability to achieve its intended interest rate path.
Wall Street economists have recently been raising concerns about a potential recession as the central bank tightens monetary policy amid headwinds, including high energy prices and Russia’s invasion of Ukraine.
“Fed is between a rock and a hard place; we won’t get out of the inflationary environment we’re in without suffering pain and scars,” said Diane Swonk, chief economist at KPMG LLP.
Economists are mixed on the outlook, with 48% seeing a recession likely in the next two years, 40% seeing some time with zero or negative interest rates likely and the rest expecting the Fed to achieve a soft landing of continued growth and low. inflation.
While Fed officials said they see persistently high inflation as the biggest risk they face, economists are split, with 37% citing inflation as the biggest risk and 19% seeing too much tightening leading to a recession as a bigger concern. The others see the worries as equals.
Beyond slowing rate hikes, economists see the Fed eventually reversing course in response to lower growth and inflation. A number of 45% see the first rate cut in the second half of 2023, while 31% expect a cut in the first half of 2024. However, markets see peak rates in the first quarter of 2023, with a cut later in the year.
“Inflation should begin to fall sharply from next March as house, used car and petrol prices look more favorable year-on-year,” said James Knightley, chief economist at ING Financial Markets. “This could open the door to a 2F rate cut.”
Economists expect the central bank could halt its rate hikes long before inflation, measured by the Fed’s preferred measure, reaches its 2% target. A number of 46% see the Fed ending its tightening with core PCE inflation, excluding food and energy, of 3.6% to 4%. Core inflation was 4.7% in May compared to that level.
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