By Prerana Bhat
BENGALURU (Reuters) – The Federal Reserve will move in December to deliver a 50-basis interest rate hike, but economists polled by Reuters say a longer period of U.S. central bank tightening and a higher policy rate peak are on the horizon. greatest risks for. current attitude.
US consumer price inflation unexpectedly fell below 8% last month, adding to already entrenched market expectations that the Fed would ease further rate hikes after four hikes. each 75-basis point.
But the latest Reuters poll shows that inflation forecasts in the year ahead and into next year are slightly higher than expected a month ago, suggesting that it is not yet time to consider an immediate pause in campaigning. tightening of the diet.
The Fed is set to raise its federal funds rate by half a percentage point to a range of 4.25%-4.50% at its Dec. 13-14 policy meeting, according to 78 of 84 economists who participated in a Nov. 14-17 Reuters poll. .
The funds rate, which the Fed raised from near zero in March in one of the fastest rate hiking campaigns on record, was widely expected to peak at at least 4.75%-5.00% early this year next, 25 basis points higher than seen. in last month’s poll. The peak rate forecasts were between 4.25%-4.50% and 5.75%-6.00%.
But 16 of 28 respondents to a further question said the greater risk was that peak rates would be higher and later than now expected, with a further four saying higher and earlier. The rest said it would be lower and earlier.
“While markets are focused on peak inflation, underlying inflation trends are ongoing. This could force the Fed to raise the federal funds rate well into next year and beyond levels currently expected at the moment,” said Philip Marey, senior US strategist at Rabobank.
Graphic Reuters poll on risks to terminal rate forecast for fed funds
Some Fed policymakers have indicated that rates would rise higher than their projections from September and would need to see a consistent and meaningful reduction in price increases to consider pausing the tightening and the core CPI running more than three times its 2% target.
Although price pressures were seen to be gradually falling, inflation as measured by the CPI together with the core personal consumption expenditure (PCE) price index was not seen returning to 2% until at least 2025.
A majority of economists, 18 out of 29, also said that the greater risk was that price increases would be greater than expected in the next six months.
“While the softer CPI report will support the Fed’s desire to slow the pace of rate hikes to 50 basis points in December, we see no clear evidence in the report that inflation will decelerate decisively towards the 2% target. Andrew Hollenhorst, chief US economist at Citigroup.
“The softer reading does not significantly affect the upside we see with inflation.”
The most aggressive tightening cycle in four decades gave a 60% chance of a US recession within a year, according to the poll, roughly the same as last month’s survey.
Although 22 out of 30 economists said the recession was likely to be shallow – the economy is expected to grow just 0.4% next year as a whole – fears of a deeper recession prompted companies to cut thousands of jobs across the country.
The unemployment rate was expected to rise from the current 3.7% to 4.6% by the end of next year – with the highest forecast at 5.9% – and an average of 4.8% in 2024, still well below levels seen in previous recessions. The unemployment rate forecasts were more or less higher compared to the previous month’s poll.
“Despite a modest increase in unemployment next year, the economy is likely to contract, putting the Fed in the unusual position of maintaining a restrictive policy stance during an economic downturn,” he said. Michael Moran, chief economist at Daiwa Capital Markets America, had one of the highest interest rate forecasts in the poll.
Reuters Poll- US economy and Federal Reserve rate forecast https://fingfx.thomsonreuters.com/gfx/polling/zdvxdorbgvx/Reuters%20Poll-%20US%20economy%20and%20Federal%20Reserve%20rate%20outlook.PNG
(For other stories from the Reuters global economic poll 🙂
(Reporting by Prerana Bhat; Additional reporting by Indradip Ghosh; Analysis by Sarupya Ganguly; Polling by Milounee Purohit and Dhruvi Shah; Editing by Ross Finley and Paul Simao)