Written by Prerana Bhatt
BENGALURU (Reuters) – The US Federal Reserve will end its tightening cycle after raising 25 basis points at each of its next two policy meetings and will then likely keep interest rates steady for at least the rest of the year, according to most economists. In a Reuters poll.
Federal Reserve officials broadly agree that the US central bank should slow down the pace of tightening to assess the impact of rate hikes. The Fed raised its benchmark overnight rate by 425 basis points last year, with the bulk of the tightening at 75 and 50 basis points.
With inflation still low, more than 80% of forecasters in the latest Reuters poll, 68 of 83, expect the Federal Reserve to turn around a 25 basis point increase at its January 31-February 1 meeting. If that materializes, it would take the policy rate — the federal funds rate — to a range of 4.50%-4.75%.
The remaining 15 see a 50 basis point rally coming in a couple of weeks, but only one of them was from a major US merchant bank that deals directly with the Fed.
The federal funds rate was expected to peak at 4.75%-5.00% in March, according to 61 of 90 economists. That matched interest rate futures prices, but was 25 basis points below the average point for 2023 in the “paint point” projections released by Fed policymakers at the end of the December 13-14 meeting.
James Knightley, ING’s chief international economist, noted, “U.S. inflation shows that price pressures are easing, but in a strong labor market environment, the Fed will be wary of setting higher interest rates.”
The projected final rate will be more than double the peak of the last tightening cycle and the highest since mid-2007, just before the global financial crisis. There was no clear consensus on where the Fed’s policy rate will be at the end of 2023, but about two-thirds of respondents expected 4.75%-5.00% or higher.
The survey’s interest rate view was slightly behind the Fed’s latest forecast, but the survey’s averages for growth, inflation, and unemployment were broadly in line.
Inflation was expected to fall further, but remain above the Fed’s 2% target for years to come, leaving relatively little chance of a rate cut anytime soon.
In response to an additional question, more than 60% of respondents, 55 out of 89, said the Fed is more likely to keep interest rates steady for at least the rest of the year than to cut them. This view is in line with the survey’s median projection of the first cut coming in early 2024.
However, a significant minority, 34, said rate cuts this year were more likely than otherwise, with 16 citing low inflation as the biggest reason. Twelve of them said there was a deeper economic slowdown and four of them said there was a sharp rise in unemployment.
“The Fed has prioritized inflation over employment, so only a sharp decline in core inflation can convince the FOMC to cut interest rates this year,” said Philip Marie, chief US strategist at Rabobank.
“While the peak of inflation is behind us, the underlying trend remains consistent… We don’t think inflation will be close to 2% before the end of the year.”
Graphic: Reuters Poll – US Federal Reserve Outlook (https://fingfx.thomsonreuters.com/gfx/polling/jnpwywrxgpw/Reuters%20Poll-%20U.S.%20Federal%20Reserve%20%20outlook.PNG)
In the meantime, the Fed is more likely to help push the economy into recession than not. The poll showed that there is a 60% chance of a recession in the United States within two years.
While that was lower than in the previous poll, many contributors did not pin down the odds of a recession to their forecasts because a recession is now the baseline state, albeit as short and shallow as several previous Reuters polls had predicted.
The world’s largest economy was expected to grow just 0.5% this year before rebounding to 1.3% in 2024, still below its long-term average of about 2%.
With the mass layoffs underway, especially in financial and technology companies, the unemployment rate was expected to rise to an average of 4.3% next year, from 3.5% currently, and then rise again to 4.8% next year.
While still historically low compared to the previous recession, the forecast was about one percentage point higher than last year.
(For other stories from the Reuters World Economic Survey:)
(Reporting by Prerana Bhatt; Polling by Meloni Purohit; Editing by Ross Finley and Paul Simao)