BENGALURU (Reuters) – The Federal Reserve will cut back in December to raise interest rates by 50 basis points, but economists polled by Reuters say a longer period for US central bank tightening and higher rate hikes are the greatest. Risks to the current outlook.
US consumer inflation unexpectedly fell below 8% last month, reinforcing an already ingrained market expectation that the Fed will press ahead with rate hikes after four consecutive 75 basis point hikes.
But the latest Reuters poll shows that inflation expectations for next year and next are slightly higher than thought a month ago, suggesting that it is not yet time to consider an imminent halt to the Fed’s tightening campaign.
The Fed is set to raise the 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 polled Nov. 14-17 by Reuters. . .
The funds rate, which the Fed raised from near zero in March in one of the fastest rate hikes ever, was widely expected to peak at a minimum of 4.75%-5.00% early next year, i.e. 25 basis points higher than what we’ve seen. in a survey last month. Peak rate forecasts ranged between 4.25%-4.50% and 5.75%-6.00%.
But 16 of the 28 respondents to an additional question said the biggest risk is that rates will peak higher and later than they expect now, with four others saying higher and earlier. The rest said it would be lower and older.
Philip Marie, chief US strategist at Rabobank, said: “While markets focus on peak inflation, underlying inflation trends persist. This could force the Fed to continue raising the federal funds rate into next year and beyond currently expected levels. “.
Several Fed policymakers have indicated that rates will rise above their expectations from September and they would have to see a steady and meaningful decrease in rate hikes to consider stopping tightening with core CPI running at more than three times their 2% target.
While price pressures were seen to gradually ease, inflation as measured by the CPI as well as the core personal consumption expenditures (PCE) price index was not seen to return to 2% until at least 2025.
The majority of economists, 18 of 29, said the biggest risk was that price increases would be greater than they expected over the next six months.
“While a softer CPI report would support the Fed’s desire to slow the pace of rate hikes to 50 basis points in December, we do not see in the report any clear evidence that inflation will slow convincingly toward the 2% target.” Andrew Hollenhorst, chief US economist at Citigroup.
“The weak reading does not significantly affect the upside we are seeing for inflation.”
The most aggressive tightening cycle in four decades has brought with it a 60% chance of a US recession within a year, according to the poll, which is roughly the same as last month’s survey.
While 22 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 contraction have 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 average 4.8% in 2024, still well below levels seen in previous recessions. Unemployment rate expectations were generally higher compared to the previous month’s survey.
“Despite a likely modest increase in unemployment next year, the economy is likely to be in a recession, which would leave the Fed in the unusual position of maintaining a restrictive policy stance during an economic downturn,” said Michael Moran, chief economist at Financial Times. Daiwa Capital Markets America, which had among the highest interest rate forecasts in the survey.
(For other stories from the Reuters World Economic Survey:)
(Reporting by Prirana Bhatt); Additional reporting by Indradeep Ghosh. Sarupia Ganguly’s analysis. survey by Meloni Purohit and Dhruvi Shah; Editing by Ross Finley and Paul Simao
Our standards: Thomson Reuters Trust Principles.