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

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

A woman holds US dollar banknotes in this illustration taken May 30, 2022. REUTERS/Dado Ruvic/Illustration

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BENGALURU, Sept 13 (Reuters) – The Federal Reserve will hike interest rates another 75 basis points next week and is likely to keep its key rate steady for an extended period once it peaks, according to a Reuters poll of economists released on Tuesday. .

Policymakers did little to push market prices back for a third consecutive three-quarters percentage point hike at the US central bank’s September 20-21 meeting, inflation, such than measured by the Fed’s preferred gauge, standing at more than three times its 2% target. Read more

A strong majority of economists, 44 out of 72, predicted the central bank would hike its fed funds rate by 75 basis points next week after two such moves in June and July, compared to just 20% who had it said just a month ago.

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If this materializes, it would bring the policy rate back to the target range of 3.00% to 3.25%, the highest since the start of 2008, before the worst of the global financial crisis. The remaining 39% still expected a 50 basis point hike.

The shift in expectations for a bigger rally pushed the dollar to its highest level in two decades against a basket of currencies. United States. The currency is expected to extend its dominance for the rest of this year and early next year.

“If there has been a change in tone from the Fed in recent months, it has been in the direction of a stronger commitment to reducing inflation, even at the risk of a slowdown,” noted Michael Gapen, Chief US Economist at Bank of America Securities. , who was among those interviewed.

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

But rising borrowing costs so rapidly carries its own risks. The poll puts the probability of a recession in the United States in the coming year at 45%, unchanged from previous forecasts, with the probability of a recession occurring in the next two years rising from 50% at 55%.

The world’s largest economy, which has seen its gross domestic product shrink in the past two quarters, is expected to grow below its long-term average trend of 2% through at least 2025, the poll found.

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

Whether or not the Fed eases its monetary tightening, either by a 50 or 25 basis point hike at its November 1-2 policy meeting, is on the razor’s edge, the poll showed. However, a majority of economists expected the central bank to opt for a 25 basis point hike at its December 13-14 meeting.

There was still no consensus among economists on where and when the Fed would stop raising rates, and similarly there was no consensus on when it would start cutting them.

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

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

Fed Chairman Jerome Powell said he and his fellow policymakers would raise rates as high as needed and hold them “for a while” to bring inflation back to the 2% target. Read more

“We just don’t see the Fed cutting rates next year, that would be too soon. They won’t have enough evidence that inflation is on a sustained downward path towards the target,” Sal Guatieri said. , senior economist at BMO Capital Markets, who was also among those interviewed.

‘WISHES’

While inflation, as measured by the CPI, is expected to average 8.0% and 3.7% this year and in 2023, respectively, a tight labor market should support price pressures, according to the survey.

The unemployment rate in the United States, which rose to 3.7% in August from 3.5% in July, is expected to average 3.7% this year before climbing to 4.2% in 2023 and 2024. read more

However, the unemployment rate needs to rise significantly to bring inflation down to 2%, according to 16 of 30 respondents to an additional question who gave a median unemployment rate of 5%. The other 14 said he did not need to increase significantly.

“The claim of wage pressures can be reduced … without significantly increasing unemployment is wishful thinking on the part of the Fed,” said Philip Marey, senior US strategist at Rabobank, who was among those interviewed.

(For more stories from the Reuters Global Economic Survey:)

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Reporting by Prerana Bhat and Indradip Ghosh; Poll by Milounee Purohit and Aditi Verma; Editing by Hari Kishan, Ross Finley and Paul Simao

Our standards: The Thomson Reuters Trust Principles.

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