The Fed’s policy rate outlook at the end of the year will rise again as the risk of recession remains

Article content

Bangalore — By the end of this year, the Federal Reserve will raise interest rates higher than expected just a month ago and continue to take advantage of the already significant risks of a recession, a Reuters economist poll said. Revealed.

Inflation in the US has been at its highest level in 40 years and may have peaked in March, but the Fed’s 2% target as prices continue to rise due to global supply chain disruptions. Has not been achieved yet.

A Reuters poll on May 12-18 found that the June policy meeting following a similar move earlier this month was about raising the federal funds rate by 50 basis points, which is currently set at 0.75% to 1.00%. A set of unanimous predictions was presented. .. One predictor expected an increase of 75 basis points.

Article content

According to 54 of the 89 economists, the Fed is expected to rise another 50 basis points in July, slowing to 25 basis points for the rest of the year. However, 18 respondents predicted another half-percentage increase in September.

The majority of poll respondents expect the federal funds rate to rise above 2.50% to 2.75% by the end of 2022. This is six months earlier than predicted in the last poll, and is in close agreement with market expectations for year-end interest rates. 2.75% -3.00%.

This will exceed the “neutral” level (estimated to be around 2.4%), which neither stimulates nor limits activity.

“The urgent goal is to neutralize the policy rate before retreating to determine the impact,” BMO senior economist Sarguatieri wrote in a note.

Article content

“The Fed can only expect an immediate reversal of inflationary pressures from rising commodity prices and the impact of a pandemic on the workforce and material supply.”

Fed Chair Jerome Powell reiterated on Tuesday that the US central bank would raise interest rates, perhaps above neutral levels, as needed.

Nearly 75% (29 out of 40) of respondents to additional poll questions said the Fed’s rate hike pass is likely to be faster than slower in the coming months.

Inflation, measured by the Consumer Price Index (CPI), is projected to average 7.1% this year, exceeding the central bank’s target until at least 2024.

The Fed’s latest global supply chain pressure gauge rose in April after a four-month fall. This suggests that these price pressures are very live, as is the case with recent Reuters analysis.

Article content

Opinion polls, on the other hand, show that the median probability of a recession in the United States is 40% over the next two years, with a one-quarter chance of a recession next year. These probabilities were stable compared to the previous survey.

What is not stable is financial market sentiment. The Standard & Poor’s 500 Equity Index appears to be at the top of the bear market, down nearly 20% from its peak near the beginning of the year.

The US economy, which shrank for the first time from January to March 2020, is expected to recover to an annual growth rate of 2.9% in the second quarter. However, the forecast was in the very wide range of 1.0% to 6.9%.

GDP growth is projected to average 2.8% this year, before it settled from 3.3%, 2.2% and 2.0% last month to 2.1% and 1.9% in 2023 and 2024, respectively.

Article content

The unemployment rate forecast is optimistic, rising from an average of 3.5% this year and next year to 3.7% in 2024.

However, more than 80% of respondents to additional questions (28 out of 34) say the unemployment rate is likely to be higher than currently expected over the next two years.

“The only realistic way to break the wage and price spiral is to boost unemployment. If the Federal Reserve accidentally doesn’t do this, they have to do it intentionally. “Let’s do it,” said Philip Marie, senior US strategist at Rabobank.

“Recession is an unavoidable result.”

(For other stories from Reuters’ World Economic Survey :)

(Report by Prerana Bhat and Indradip Ghosh, polling by Vijayalakshmi Srinivasan and Shrutee Sarkar, edited by Ross Finley and Paul Simao)