By Prerna Bhat and Indradeep Ghosh
BENGALURU (Reuters) – The Federal Reserve will hike interest rates by another 75-basis-point in July, followed by a half-percentage-point hike in September, and will not go back to quarter-percentage-point moves until November. At the earliest, according to economists polled by Reuters.
Last week the Fed raised the federal funds rate by three-quarters of a percent, its biggest rate hike since 1994, just days after official data showed inflation unexpectedly peaked despite expectations that it had risen.
The latest election results released Wednesday before Fed Chairman Jerome Powell, due to appear before the Senate Banking Committee as part of his two-time monetary policy testimony to Congress, show that momentum is still behind the US central bank. , no less, despite rising bearish concerns and heavy selling in financial markets. Bond yields have risen sharply and major Wall Street equity indexes are already trading in a bear market, defined as 20% below their peak.
In a June 17-21 Reuters poll, nearly three-quarters of economists, 67 of 91, expected another 75-basis-point US rate hike in July. This would push the fed funds rate to a range of 2.25%-2.50%, a roughly neutral level where the Fed estimates the economy is neither stimulated nor restricted.
A strong majority expects the central bank to increase its policy rate by 50 basis points in September, with opinion more divided on whether it will increase it by 25 or 50 basis points in November. Most expect the Fed to raise rates by 25 basis points at its December meeting.
It would take the fed funds rate to a range of 3.25%-3.50% by the end of this year, which is 75 basis points higher than thought in a poll published two weeks ago.
Powell indicated last week that a break in the current tightening cycle would be possible only after a meaningful decline in inflation, which is currently more likely than previously thought a few weeks ago.
“Since the Fed is still underestimating the inflation problem … in a note,” Philip Mare, senior US strategist at Rabobank, wrote.
“Unfortunately, a slowdown is likely to get in the way of hiking as well.”
Graphic: Reuters Poll – US Economy and Federal Funds Rate Outlook – https://fingfx.thomsonreuters.com/gfx/polling/egvbkgazjpq/Reuters%20Poll-%20US%20economy%20and%20Fed%20rate%20outlook.PNG
Inflation will remain above the Fed’s 2% target until at least 2025, according to its own projections and a separate Reuters poll. [ECILT/US]
Although the Fed was expected to move to a 25-basis-point rate hike in November, a significant minority, about 40%, expected a 50-basis-point hike at that month’s meeting. Only a handful said the Fed would halt its rate hikes this year.
Nearly three-quarters of respondents, 68 out of 91, saw end-of-year rates of 3.25%-3.50% or higher, consistent with the Fed’s own “dot plot” reflecting policymakers’ estimates.
Aggressive rate hikes come with their own risks, as reflected in the Fed’s economic projections, where forecasts for the US unemployment rate were raised significantly and economic growth trends were predicted to remain below average.
The poll predicted only a 25-basis-point increase in the first quarter of next year, raising the federal funds rate to a potential terminal rate of 3.50%-3.75%.
According to average forecasts from a small sample, the Fed was expected to halt in the second and third quarters of 2023 and cut rates by 25 basis points in the last quarter of next year. But the forecast where the fed funds rate will be between 2.50%-2.75% and 4.25%-4.50% by the end of 2023 underscores the high uncertainty.
Despite Powell saying the Fed was not trying to induce a recession, some primary dealers have either started predicting one earlier this year or brought forward their own bearish calls.
(Reporting by Prerna Bhat and Indradeep Ghosh; Voting by Swati Nair and Sushobhan Sarkar; Editing by Paul Simao)