By Prerana Bhat
BENGALURU (Portal) – The US Federal Reserve is set to end its tightening cycle after a 25 basis-point hike at each of its next two monetary policy meetings and then likely keep interest rates stable for at least the rest of the year, according to most economists in a Portal poll.
Fed officials are largely in agreement that the Federal Reserve should slow the pace of tightening to gauge the impact of rate hikes. The Fed raised its federal funds rate benchmark by 425 basis points last year, with most of the tightening occurring in 75 and 50 basis point increments.
As inflation continues to ease, more than 80% of forecasters in the latest Portal poll, 68 out of 83, predicted the Fed would scale back to a 25 basis point hike at its Jan. 31-February 1 meeting. If this is realized, it would put the policy rate – the Federal Funds Rate – in the 4.50% to 4.75% range.
The remaining 15 expect a 50 basis point hike in two weeks, but only one of those comes from a US primary dealer bank that deals directly with the Fed.
According to 61 out of 90 economists, the fed funds rate was expected to peak in March at 4.75% to 5.00%. That was in line with interest rate futures pricing but was 25 basis points below the median point for 2023 in the “dot plot” forecasts released by Fed policymakers at the end of the May 13-14 meeting. were published in December.
“US inflation shows that price pressures are easing, but in a strong labor market environment the Federal Reserve will be wary of capping interest rates,” noted James Knightley, chief international economist at ING.
The expected final rate would be more than double what it was in 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 interest rate would be at the end of 2023, but around two-thirds of respondents had a forecast of 4.75% to 5.00% or higher.
The interest rate outlook in the survey came in slightly below the Fed’s most recent projections, but the survey medians for growth, inflation and unemployment were broadly in line.
The story goes on
Inflation was forecast to fall further but remain above the Fed’s 2% target for the coming years, leaving a relatively slim chance of rate cuts any time soon.
When asked an additional question, more than 60% of respondents, 55 out of 89, said the Fed would rather keep interest rates stable for the rest of the year than cut them. That view was consistent with the survey’s median forecast for the first cut in early 2024.
However, a significant minority, 34, said rate cuts were more likely than not this year, with 16 citing a fall in inflation as the main reason. Twelve spoke of a deeper economic downturn and four of a sharp rise in unemployment.
“The Fed has prioritized inflation over employment, so only a sharp fall in core inflation can convince the FOMC (Federal Open Market Committee) to cut rates this year,” said Philip Marey, senior US strategist at the Rabobank.
“Although the peak of inflation is behind us, the underlying trend remains…we don’t think inflation will be close to 2% before the end of the year.”
GRAPH: Portal Poll – Federal Reserve Outlook (https://fingfx.thomsonreuters.com/gfx/polling/jnpwywrxgpw/Portal%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 found a nearly 60 percent chance of a US recession within two years.
While this was lower compared to the previous poll, several participants had not assigned recession probabilities to their forecasts as a slump was now their base case, albeit a short and flat one, as predicted in several previous Portal polls.
The world’s largest economy was expected to grow just 0.5% this year before recovering to 1.3% growth in 2024, still below its long-term average of around 2%.
With mass layoffs ongoing, particularly in financial and tech companies, the unemployment rate should rise from 3.5% now to an average of 4.3% next year and then back to 4.8% next year.
While still historically low compared to previous recessions, forecasts were about 1 percentage point higher than a year ago.
(For other stories from Portal Global Business Survey:)
(Reporting by Prerana Bhat; Polling by Milounee Purohit; Editing by Ross Finley and Paul Simao)