WASHINGTON • Federal Reserve officials will pull the trigger on another interest rate increase this week before slowing the pace of hikes next year as risks to the US economy mount, according to a new Bloomberg poll of economists.
They expect the Fed will raise rates by a quarter percentage point at its Dec 18-19 meeting while dialling back the number of moves next year to two, in March and September, from the three hikes economists saw in September.
Median responses in the Dec 7-11 poll also anticipate one additional hike in mid-2020, when the rate would peak in this tightening cycle at a target range of 3 per cent to 3.25 per cent.
The somewhat more dovish expectations fit with a more cautious tone projected in recent weeks by Fed policymakers, including chairman Jerome Powell, and with the anxiety exhibited in financial markets. Since the end of September, the S&P 500 Index of US stocks has plunged more than 9 per cent.
"There's still some upside potential, but there is a whole laundry list of factors" that will either slow the economy or threaten to slow it, said Mr Scott Brown, chief economist at Raymond James. He included the waning impact of stimulative US fiscal policies, the trade dispute with China, a potentially chaotic exit for the United Kingdom from the European Union, and the possibility the Fed might tighten too much.
Investors see a 77 per cent chance the Fed will move this week and are betting on less than one full quarter-point increase next year, according to pricing in interest rate futures.
More than half the economists said risks, with respect to growth and inflation, were now tilted to the downside. In September, just 16 per cent of respondents had that view. Upside risks had dominated responses to this question in each survey of this quarterly series since December last year.
Despite the shift, economists did not expect Fed officials to make as strong a turn in their post-meeting statement. About two-thirds said the Fed will stick with language stating "near-term risks to the economic outlook appear roughly balanced". Nine per cent anticipate the Fed will characterise risks as tilted to the downside.
"From a communications standpoint, the Fed does not want to appear overly dovish," said Mr Gregory Daco, chief US economist at Oxford Economics in New York. "The pivot we saw over the last 10 days was enough," he added, referring to speeches from both Mr Powell and Fed vice-chairman Richard Clarida. Nor did the economists surveyed expect policymakers to alter their forecasts for growth, unemployment or inflation in the next three years.
A number of respondents, however, do expect a separate, meaningful change to the statement; 41 per cent believe policymakers will drop language this week declaring the need for "further gradual increases". That percentage rises to 74 per cent by March. Such a move could be construed as dovish, but may also simply reflect what Mr Powell has already said publicly: The Fed is closing in on the range where it's likely to stop lifting rates.
Economists rejected the notion that President Donald Trump's repeated criticism of Fed rate hikes would impact the central bank's decision-making, with 89 per cent saying it would have no influence.
BLOOMBERG
