Wednesday, July 6

Year-end view for Fed policy rate rises again as recession risks remain


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BENGALURU — The US Federal Reserve will lift interest rates higher by the end of this year than anticipated just a month ago, keeping alive already-significant risks of a recession, a Reuters poll of economists found.

While US inflation, running at a four-decade high, may have peaked in March, the Fed’s 2% target is still far out of reach as disruptions to global supply chains continue to keep price rises elevated.

The May 12-18 Reuters poll showed a near-unanimous set of forecasts for a 50-basis-point hike in the fed funds rate, currently set at 0.75%-1.00%, at the June policy meeting following a similar move earlier this month . One forecaster anticipated a hike of 75 basis points.

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The Fed is expected to hike by another 50 basis points in July, according to 54 of 89 economists, before slowing to 25-basis-point hikes for the remaining meetings this year. But 18 respondents predicted another half-percentage-point rise in September too.

A majority of poll respondents now expect the fed funds rate to be at 2.50%-2.75% or higher by the end of 2022, six months earlier than predicted in the previous poll, and roughly in line with market expectations for a year-end rate of 2.75%-3.00%.

That would bring it above the “neutral” level that neither stimulates nor restricts activity, estimated at around 2.4%.

“The pressing goal is to bring policy rates to neutral, before stepping back to judge the impact,” Sal Guatieri, senior economist at BMO, wrote in a note.

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“The Fed can only hope that inflation pressure stemming from high commodity prices and the pandemic’s impact on labor and material supplies will reverse soon.”

Fed Chair Jerome Powell on Tuesday reiterated that the US central bank would ratchet up interest rates as high as needed, possibly above the neutral level.

Nearly 75% of respondents to an additional question in the poll – 29 of 40 – said the Fed’s rate hike path was more likely to be faster over the coming months than slower.

Inflation, as measured by the Consumer Price Index (CPI), was forecast to average 7.1% this year, and remain above the central bank’s target until 2024 at least.

The New York Fed’s latest global supply chain pressure gauge rose in April after four months of declines, suggesting those price pressures remain very much alive, as did a recent Reuters analysis.

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Meanwhile the poll showed a median 40% probability of a US recession over the next two years, with a one-in-four chance of that happening in the coming year. Those probabilities were steady compared with the last survey.

What hasn’t remained steady is sentiment in financial markets. The Standard & Poor’s 500 equities index appears to be on the cusp of a bear market, down close to 20% from its peak near the start of the year.

The US economy, which contracted for the first time since 2020 in the January-March period, was expected to rebound to an annualized growth rate of 2.9% in the second quarter. But forecasts were in a significantly wide range of 1.0%-6.9% .

GDP growth was predicted to average 2.8% this year before moderating to only 2.1% and 1.9% in 2023 and 2024, respectively, down from the 3.3%, 2.2% and 2.0% predicted last month.

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Forecasts for the unemployment rate remained optimistic, averaging 3.5% this year and next, before picking up to 3.7% in 2024.

But more than 80% of respondents to an additional question – 28 of 34 – said that over the coming two years it was more likely that unemployment would be higher than they currently expected than lower.

“The only realistic way to break the wage-price spiral is to push up the unemployment rate. If the Fed does not do this by accident, they will have to do it by design,” said Philip Marey, senior US strategist at Rabobank.

“A recession is the inevitable outcome.”

(For other stories from the Reuters global economic poll: )

(Reporting by Prerana Bhat and Indradip Ghosh; Polling by Vijayalakshmi Srinivasan and Shrutee Sarkar; Editing by Ross Finley and Paul Simao)

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