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Fed set for another 75-basis-point rate hike; early pivot unlikely: Reuters poll

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Economy one hour ago (Sep 12, 2022 08: 11PM ET)

Fed set for another 75-basis-point rate hike; early pivot unlikely: Reuters poll Reuters. Woman holds U.S. dollar banknotes in this illustration taken May 30, 2022. REUTERS/Dado Ruvic/Illustration

By Prerana Bhat and Indradip Ghosh

BENGALURU (Reuters) – The Federal Reserve will deliver another 75-basis-point interest hike in a few days and likely hold its policy rate steady for a long period once it eventually peaks, in accordance with a Reuters poll of economists released on Tuesday.

Policymakers did little to rebel on market pricing for a third consecutive rate hike of three-quarters of a share point at the U.S. central bank’s Sept. 20-21 meeting, with inflation, as measured by the Fed’s preferred gauge, running at a lot more than 3 x its 2% target.

A solid most economists, 44 of 72, predicted the central bank would hike its fed funds rate by 75 basis points in a few days after two such moves in June and July, in comparison to only 20% who said so only a month ago.

If realized, that could take the policy rate to the 3.00%-3.25% target range, the best since early 2008, prior to the worst of the global financial meltdown. The rest of the 39% still expected a 50-basis-point hike.

The shift in expectations for the bigger hike has pushed the dollar to a two-decade high against a basket of currencies. The U.S. currency was forecast to increase its dominance for the rest of the year and into early next. [EUR/POLL]

“If there’s been a shift in the Fed’s tone lately, it’s been in direction of a stronger commitment to reducing inflation, even at the chance of a downturn,” noted Michael Gapen, chief U.S. economist at Bank of America (NYSE:) Securities, who was simply the type of polled.

Like numerous others in the poll, Gapen recently changed his forecast showing the Fed hiking rates by 75 basis points in a few days instead of half a percentage point.

But raising borrowing costs so quickly includes its risks. The poll put the likelihood of a U.S. recession on the year ahead at 45%, unchanged from the prior forecast, with the opportunity of 1 occurring on the next 2 yrs rising to 55% from 50%.

The world’s No. 1 economy, which includes seen its gross domestic product contract during the past two quarters, was likely to grow below its long-term average trend of 2% until at the very least 2025, based on the poll.

Economists said the interest outlook for the September meeting could change if inflation drops. The U.S. Labor Department is because of release consumer price index data on Tuesday, with economists polled by Reuters forecasting the CPI would rise 8.1% in the 12 months through August. The CPI jumped 8.5% in the 12 months through July.

Set up Fed slows its monetary tightening, either by way of a 50- or 25-basis-point hike at its Nov. 1-2 policy meeting, is on a knife’s edge, the poll showed. Most the economists, however, expected the central bank to decide on a 25-basis-point hike at its Dec. 13-14 meeting.

There is still no consensus among economists on where so when the Fed will minimize hiking rates, and similarly there is no consensus on when it could start cutting them.

On the list of economists who had a view through the finish of 2023, 47% forecast a minumum of one rate cut, down from 57% in a poll last month.

After the fed funds rate reaches a peak, the central bank is more prone to leave it unchanged for a long period instead of cut it quickly, in accordance with a lot more than 80% of respondents who answered yet another question.

Fed Chair Jerome Powell has said he and his fellow policymakers will raise rates as high as needed and would keep them there “for quite a while” to create inflation right down to the 2% target.

“We just don’t start to see the Fed cutting rates next year, it will be too soon. They don’t have sufficient evidence inflation is on a sustained downward course towards the mark,” said Sal Guatieri, senior economist at BMO Capital Markets, who also was the type of polled.

‘WISHFUL THINKING’

While inflation, as measured by CPI, was forecast to average 8.0% and 3.7% this season and in 2023, respectively, a good labor market was likely to underpin price pressures, based on the poll.

The U.S. jobless rate, which rose to 3.7% in August from 3.5% in July, was forecast to average 3.7% this season before climbing to 4.2% in 2023 and 2024.

However, the unemployment rate must go significantly higher to create inflation right down to 2%, in accordance with 16 of 30 respondents to yet another question who gave a median jobless rate of 5%. Another 14 said it didn’t have to rise significantly.

“The claim wage pressures could be reduced … without substantially increasing unemployment is wishful thinking on the Fed’s part,” said Philip Marey, senior U.S. strategist at Rabobank, who was simply the type of polled.

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

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