BENGALURU – The US Federal Reserve will raise interest rates by the end of this year higher than expected a month ago, saving the already-significant risk of a recession, according to a Reuters survey of economists.
Although US inflation, running at a four-decade high, may be at its peak in March, the Fed’s 2% target is still out of reach as prices continue to rise due to disruptions in the global supply chain.
A May 12-18 Reuters poll showed a nearly unanimous set of forecasts for a 50-basis-point increase in the Fed funds rate at the June policy meeting following a similar move earlier this month, currently set at 0.75% -1.00%. . One predictor expected an increase of 75 basis points.
The Fed is expected to raise another 50 basis points in July, according to 54 of the 89 economists, before slowing growth to 25-basis-points for the rest of this year’s meetings. But 18 respondents also predicted a further half-percentage-point increase in September.
The majority of respondents to the survey now expect the Fed Funds rate to be 2.50% -2.75% or higher by the end of 2022, six months ahead of the previous poll forecast, and roughly 2.75% -3.00% consistent with market expectations for the year-end rate.
This will bring it above the “neutral” level which does not stimulate or limit activity, an estimated 2.4%.
“The goal of the pressure is to keep policy rates neutral, before stepping back to judge the impact,” Sal Guttierez, a senior economist at BMO, wrote in a note.
“The Fed can only hope that the inflationary pressures arising from high commodity prices and the impact of the epidemic on labor and material supplies will soon be reversed.”
Fed Chair Jerome Powell reiterated on Tuesday that the US Federal Reserve would raise interest rates as needed, possibly above neutral levels.
About 75% of respondents to an additional question in the survey – 29 out of 40 – said that the Fed’s rate hike is likely to accelerate in the coming months rather than slow down.
Inflation, as measured by the Consumer Price Index (CPI), is forecast to average 7.1% this year, and will remain above the central bank’s target for at least 2024.
The New York Fed’s latest global supply chain pressure gauge rose in April after a four-month slump, suggesting that this price pressure is likely to stay largely alive, as Reuters recently analyzed.
The survey, meanwhile, showed a 40% chance of a US recession in the next two years, with one in four likely next year. Those prospects were stable compared to the last survey.
What is not stable is the feeling of the financial market. The Standard & Poor’s 500 equity index appears to be at the top of the bear market, hovering around 20% from its peak at the beginning of the year.
The U.S. economy, which contracted for the first time since 2020 in the January-March period, was expected to return to an annual growth rate of 2.9% in the second quarter. But the forecast was in a significantly wider range of 1.0% -6.9%.
GDP growth averaged 2.8% this year before averaging only 2.1% and 1.9% in 2023 and 2024, down from 3.3%, 2.2% and 2.0% forecasted last month.
The forecast for the unemployment rate remains optimistic, averaging 3.5% this year and next 3.5% before picking up in 2024.
But more than 80% of respondents to an additional question – 28 out of 34 – said that unemployment is likely to be higher than expected in the next two years.
“The only real way to break the spiral of wages is to raise the unemployment rate. If the Fed doesn’t do it by accident, they have to do it by design, “said Philip Marie, a senior US strategist at Rabobank.
“A recession is the inevitable consequence.”
(For other stories from Reuters Global Economic Poll 🙂
(Reporting by Prerna Bhatt and Indradeep Ghosh; Polling by Vijayalakshmi Srinivasan and Shruti Sarkar; Editing by Ross Finlay and Paul Simao)