The Fed will offer two 25 basis point hikes in the first quarter, followed by a long pause

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

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

If inflation continues to fall, more than 80% of forecasters in the latest Reuters poll, 68 out of 83, predicted the Fed would move to a 25 basis point hike at its Jan. 1 meeting. February 31 meeting. If that were to happen, it would bring the key rate – the federal funds rate – into the range of 4.50% to 4.75%.

The other 15 see a 50 basis point hike in two weeks, but only one of them came from a US primary dealer bank that deals directly with the Fed.

The federal funds rate is expected to peak at 4.75%-5.00% in March, according to 61 of 90 economists. That matched the prices of interest rate futures, but was 25 basis points lower than the midpoint for 2023 in the “dot plot” projections released by Fed policymakers at the end of December. 13-14 meeting.

“US inflation shows price pressures easing, but in a strong job market environment, the Federal Reserve will be wary of calling the top in interest rates,” noted James Knightley, Chief International Economist at ING.

The expected final 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 key rate would be at the end of 2023, but about two-thirds of respondents had a forecast of 4.75% to 5.00% or higher.

The view for interest rates in the survey was slightly lower than the Fed’s recent projections, but the polls’ medians for growth, inflation and unemployment were broadly in line.

Inflation is expected to decline further, but remain above the Fed’s 2% target for years to come, leaving a relatively small chance of a rate cut anytime soon.

In response to an additional question, more than 60% of respondents, 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 matched the survey’s median projection for the first cut coming in early 2024.

However, a significant minority, 34, said rate cuts this year were more likely than not, with 16 citing a drop in inflation as the main reason. Twelve reported a deeper economic downturn and four reported a sharp rise in unemployment.

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

“While the peak of inflation is behind us, the underlying trend remains persistent…we do not expect inflation to approach 2% before the end of the year.”

Reuters Poll – US Federal Reserve Outlook

In the meantime, the Fed is more likely to help push the economy into a recession than not. The poll showed an almost 60% chance of a US recession within two years.

Although this is down from the previous survey, several contributors had not assigned recession probabilities to their forecasts as a collapse was now their base case scenario, albeit short and shallow as projected in several previous surveys. from Reuters.

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

With massive layoffs underway, particularly at financial and tech companies, the jobless rate is expected to climb to 4.3% on average next year, from 3.5% currently, then rise to 4.8% next year. next year.

Although still historically low compared to previous recessions, the forecast was about 1 percentage point higher than a year ago.

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

Reporting by Prerana Bhat; Poll by Milounee Purohit; Editing by Ross Finley and Paul Simao

Our standards: The Thomson Reuters Trust Principles.


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