By Prerana Bhat
BENGALURU (Reuters) – The Federal Reserve will downshift in December to deliver a 50 basis point rate hike, but economists polled by Reuters say an extended period of Fed tightening and a higher policy interest rate spike are the biggest risks to the economy. current outlook.
US consumer price inflation unexpectedly fell below 8% last month, reinforcing already established market expectations that the Fed would go for smaller rate hikes in the future after four consecutive 75 basis point hikes.
But the latest Reuters poll shows that inflation forecasts for the coming year and the next are slightly higher than thought a month ago, suggesting that it is not yet time to call an imminent pause in the US tightening campaign. Fed to consider.
According to 78 of the 84 economists who participated in a November 14-17 poll, the Fed will raise its federal funds rate by half a percentage point to 4.25%-4.50% at its December 13-14 policy meeting. .
Fed rates, which the Fed raised from near zero in March in one of its fastest-ever rate-hike campaigns, were widely expected to peak at a minimum of 4.75%-5.00% early next year, 25 basis points higher than previously in last month’s poll. Peak percentage projections ranged between 4.25%-4.50% and 5.75%-6.00%.
But 16 of 28 respondents to a supplementary question said the greater risk was that rates would peak higher and later than they currently expect, and another four said higher and sooner. The rest said it would be lower and sooner.
“While markets are focused on peak inflation, underlying inflation trends are continuing. This could force the Fed to continue raising the federal funds rate well into next year and beyond current expected levels,” said Philip Marey, senior U.S. strategist at Rabobank.
Reuters Poll Chart on Risks to Your Fed Funds Closing Price Forecast
Several Fed policymakers have signaled that rates would move higher than their forecasts from September and that they would need to see a consistent and meaningful decline in price increases to consider pausing the tightening as core CPI rose more than three times their target would reach 2%.
While price pressures gradually eased, inflation, as measured by the CPI and the Personal Consumption Expenditure Index (PCE), was not seen to return to 2% until at least 2025.
A majority of economists, 18 out of 29, also said the greater risk was that price increases over the next six months would be greater than expected.
“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 slow convincingly toward the 2% target”, noted. Andrew Hollenhorst, chief US economist at Citigroup.
“The softer reading has no significant impact on the upside we see for inflation.”
The most aggressive tightening cycle in four decades has carried a 60% chance of a U.S. recession within a year, roughly on par with last month’s survey, according to the poll.
While 22 out of 30 economists said the recession was likely to be shallow — the economy as a whole will only grow 0.4% next year — fears of a deeper downturn 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 a top forecast of 5.9% – and an average of 4.8% in 2024, still well below the level from previous recessions. Projections for the unemployment rate were generally higher compared to the previous month’s poll.
“Despite a potentially modest increase in unemployment next year, the economy will most likely be in recession, putting the Fed in the unusual position of maintaining restrictive policies during an economic downturn,” said chief economist Michael Moran. at Daiwa Capital Markets America, which had one of the highest interest rate forecasts in the poll.
Reuters Poll – US Economy and Federal Reserve interest rate outlook https://fingfx.thomsonreuters.com/gfx/polling/zdvxdorbgvx/Reuters%20Poll-%20US%20economy%20and%20Federal%20Reserve%20rate%20outlook.PNG
(For other stories from 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)