The Fed decided to raise the interest rate by 75 basis points; Likely early pivot: Reuters poll

A woman holds US dollar bills in this illustration taken on May 30, 2022. REUTERS/Dado Rovich/Illustration

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BENGALURU (Reuters) – The Federal Reserve will raise interest rates by 75 basis points next week and is likely to keep the rate on hold for an extended period once it eventually peaks, a Reuters poll of economists released on Tuesday showed. .

Policymakers did little to roll back market pricing for a third consecutive rate hike of three-quarters of a percentage point at the US central bank’s Sept. 20-21 meeting, with inflation, as measured by the Fed’s preferred metric, operating at a higher rate. More than triple its 2% target. Read more

A large majority of economists, 44 out of 72, expected the central bank to raise the federal funds rate by 75 basis points next week after two such moves in June and July, compared to just 20% who said so just a month ago.

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If achieved, it would take the policy rate to the 3.00%-3.25% target range, the highest since early 2008, before the worst of the global financial crisis. The remaining 39% still expect a 50 basis point rise.

The shift in expectations for a bigger rally has sent the dollar to a two-decade high against a basket of currencies. United State. The currency was expected to extend its dominance for the remainder of this year and into early next year.

Michael Gaben, chief US economist at Bank of America Securities, noted that “if there has been a shift in the Fed’s tone in recent months, it has been in the direction of a stronger commitment to lower inflation, even with the threat of deflation.” , who was among those surveyed.

Like many others in the poll, Gaben recently changed his forecast to show the Federal Reserve will raise rates by 75 basis points next week instead of half a percentage point.

But increasing borrowing costs so quickly comes with its own risks. The poll estimated that the probability of a recession in the United States over the next year is 45%, unchanged from previous forecasts, with the probability of a recession in the next two years rising to 55% from 50%.

According to the survey, the world’s No. 1 economy, which has experienced a contraction of GDP in the past two quarters, was expected to grow below its long-term average trend of 2% until at least 2025.

Economists said interest rate expectations for the September meeting could change if inflation eases. The US Labor Department is set to release consumer price index data on Tuesday, with economists polled by Reuters expecting the consumer price index to rise 8.1% in the 12 months through August. The CPI jumped 8.5% in the 12 months to July.

The poll showed that whether or not the Fed slows its monetary tightening, either through a 50 or 25 basis point hike at its November 1-2 policy meeting, is on edge. With that said, the majority of economists expected the central bank to opt for a 25 basis point increase at its December 13-14 meeting.

There is still consensus among economists about where and when the Fed will stop raising interest rates, and similarly there has been no consensus on when it will start cutting them.

Among economists who had a view to the end of 2023, 47% expected at least one interest rate cut, down from 57% in last month’s poll.

Once the federal funds rate peaks, the central bank is more likely to leave it unchanged for an extended period than to cut it quickly, according to more than 80% of respondents who answered an additional question.

Fed Chair Jerome Powell said he and fellow policymakers will raise interest rates when needed and will keep them there “for some time” to bring inflation down to the 2% target. Read more

“We don’t expect the Fed to cut rates next year, it would be too early. They won’t have enough evidence that inflation is on a sustained downward path toward the target,” said Sal Gutierre, chief economist at BMO Capital Markets. . who was also among those surveyed.

‘wise thinking’

While inflation, according to the Consumer Price Index, was expected to average 8.0% and 3.7% this year and in 2023 respectively, a tight labor market was expected to support price pressures, according to the survey.

The US unemployment rate, which rose to 3.7% in August from 3.5% in July, was expected to average 3.7% this year before rising to 4.2% in 2023 and 2024. Read more

However, the unemployment rate would have to rise significantly to bring inflation down to 2%, according to 16 out of 30 respondents to an additional question that gave the average unemployment rate 5%. The other 14 said they didn’t need to go up much.

Philip Marie, chief US strategist at Rabobank, who was among those surveyed, said:

(For other stories from the Reuters World Economic Poll 🙂

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(Reporting by Prirana Bhatt and Indradeep Ghosh) Poll of Meloni Purohit and Aditi Verma; Editing by Harry Kishan, Ross Finley and Paul Simao

Our criteria: Thomson Reuters Trust Principles.

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