By Prerana Bhat
BENGALURU (Reuters) – The Federal Reserve will step back in December to push for a 50 basis point rate hike, but economists polled by Reuters say the longest period of U.S. central bank tightening and the highest interest rate peak are the biggest risks to the current outlook.
U.S. consumer price inflation unexpectedly fell below 8% last month, bolstering market expectations that the Fed will move to smaller rate hikes after four consecutive 75 basis point hikes.
But the latest Reuters poll shows inflation forecasts next year and next are slightly higher than expected a month ago, suggesting it is not yet time to consider an imminent pause in the Fed’s tightening campaign.
The Fed is set to raise its federal funds rate by half a percentage point to a range of 4.25%-4.50% at its December 13-14 policy meeting, according to 78 of 84 economists polled by Reuters on 14 -17 November. .
The funds rate, which the Fed raised from near zero in March in one of its fastest rate-hiking campaigns ever, was widely expected to peak at least at 4.75%-5.00% early next year, 25 basis points higher than seen in last month’s poll. Forecasts for the maximum rate ranged between 4.25%-4.50% and 5.75%-6.00%.
But 16 of 28 respondents to an additional question said the biggest risk was rates peaking higher and later than they now expect, with another four saying higher and earlier. The rest said it would be lower and sooner.
“While markets are focused on peak inflation, underlying inflation trends are persistent. This could force the Fed to continue raising the federal funds rate over the next year and beyond levels currently expected,” said Philip Marey, senior US strategist at Rabobank.
Reuters poll chart on risks to terminal feeder fund rate forecast
Several Fed policymakers have indicated that interest rates will rise higher than they forecast from September and would need to see a consistent and substantial drop in rate hikes to consider a pause in tightening with the core CPI running longer than three times the 2% target.
While price pressures appeared to be easing gradually, inflation as measured by the CPI as well as the core personal consumption expenditure (PCE) price index did not appear to return to 2% until at least 2025.
A majority of economists, 18 out of 29, also said the biggest risk was that price increases would be bigger than they expected over the next six months.
“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 indication in the report that inflation will decelerate convincingly toward the 2% target.” , write down. Andrew Hollenhorst, chief US economist at Citigroup.
“The softer indication does not significantly affect the upward path we see in inflation.”
The most aggressive tightening cycle in four decades brought with it a 60 percent chance of a U.S. recession within a year, the poll found, roughly similar to last month’s survey.
While 22 of 30 economists said the recession would likely be shallow — the economy is forecast to grow just 0.4 percent next year as a whole — fears of a deeper recession have prompted companies to cut thousands of jobs across the country. .
The unemployment rate was expected to rise from today’s 3.7% to 4.6% by the end of next year – with the highest forecast at 5.9% – and average 4.8% in 2024, well below the levels seen in previous recessions. Projections for the jobless rate were broadly higher compared to last month’s poll.
“Despite a potentially modest increase in unemployment next year, the economy will likely be in recession, leaving the Fed in the unusual position of maintaining a tightening policy during a downturn,” said Michael Moran, chief economist at Daiwa Capital Markets America, which had one of the highest rate forecasts in the poll.
Reuters Poll- Economy and Federal Reserve Rate Outlook https://fingfx.thomsonreuters.com/gfx/polling/zdvxdorbgvx/Reuters%20Poll-%20US%20economy%20and%20Federal%20Reserve%20rate%20outlook. PNG
(For other stories from the 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)