The Fed will make two 25 basis point hikes in Q1, followed by a long pause

BENGALURU, Jan 20 (Reuters) – The U.S. Federal Reserve will end its tightening cycle after hiking by 25 basis points at each of its next two policy meetings and is likely to keep interest rates steady for at least the rest of the year. to most economists in a Reuters poll.

Fed officials widely agree that the U.S. central bank should slow the pace of tightening to gauge the impact of rate hikes. The Fed raised its overnight rate by 425 basis points last year, with the bulk of the tightening coming in moves of 75 and 50 basis points.

As inflation continues to ease, more than 80% of forecasters in a recent Reuters poll, 68 of 83, expected the Fed to cut its rate hike by 25 basis points at its Jan. 31-Feb. 1 meeting. If implemented, it would push the policy rate — the federal funds rate — to a range of 4.50% to 4.75%.

The remaining 15 saw gains of 50 basis points over two weeks, but only one was from a major dealer bank that deals directly with the US Fed.

According to 61 of 90 economists, the Fed funds rate was expected to peak at 4.75%-5.00% in March. That was in line with interest rate futures prices, but was 25 basis points below the midpoint for 2023 in the “point plan” projections given by Fed policymakers at the end of their Dec. 13-14 meeting.

James Knightley, ING’s chief international economist, noted that “US inflation shows that price pressures are easing, but the Federal Reserve will be reluctant to call for a peak in interest rates amid a strong job market.”

The expected terminal rate would be more than double the peak of the last tightening cycle and the highest since mid-2007, just before the global financial crisis. There was no clear consensus on where the Fed’s policy rate will be at the end of 2023, but about two-thirds of respondents forecast 4.75% to 5.00% or higher.

The interest rate outlook in the survey was slightly behind the Fed’s latest projections, but the survey medians for growth, inflation and unemployment were largely in line.

Inflation was forecast to fall further, but remain above the Fed’s 2% target for the coming years, keeping the chances of a rate cut any time soon relatively slim.

In response to a follow-up question, more than 60% of respondents, or 55 out of 89, said the Fed was more likely to hold rates steady for at least the rest of the year than cut them. This view is in line with the survey’s median forecast for the first cut to come in early 2024.

However, a significant minority, 34, said rate cuts were more likely this year, while 16 cited a drop in inflation as the biggest reason. Twelve reported a deeper economic recession, and four reported a sharp rise in unemployment.

“The Fed has prioritized inflation over employment, so only a sharp drop in core inflation could convince the FOMC (Federal Open Market Committee) to cut rates this year,” said Philip Murray, chief US strategist at Rabobank.

“Although the peak of inflation is behind us, the underlying trend remains persistent…we do not expect inflation to be close to 2% until the end of the year.”

Reuters poll – US Federal Reserve forecast

Meanwhile, the Fed is more likely to help push the economy into recession. The survey showed a nearly 60% chance the US will be in recession within two years.

Although this was lower than in the previous survey, several participants did not include the possibility of a recession in their forecasts, as a recession was now their main scenario, albeit a short and shallow one, as predicted in several previous Reuters polls.

The world’s largest economy was expected to grow just 0.5% this year before returning to 1.3% growth in 2024, still below the long-term average of 2%.

The unemployment rate was expected to rise to an average of 4.3% next year from the current 3.5% and rise again to 4.8% next year, as massive layoffs continue, particularly at financial and technology companies.

While still historically low compared to previous recessions, forecasts were about 1 percentage point higher than a year ago.

(For other stories from the Reuters global economic survey 🙂

Reporting by Prerana Bhat; Survey by Milounee Purohit; Edited by Ross Finley and Paul Simao

Our standards: Thomson Reuters Trust Principles.

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