Fed to deliver 25-basis-point hike in May, stay on hold rest of year: Poll
Sign up now: Get ST's newsletters delivered to your inbox
A recession might impede the Fed’s ability to take rates much higher, especially as many of its previous rate rises have not yet filtered into the economy.
PHOTO: REUTERS
BENGALURU – The United States Federal Reserve will deliver a final 25 basis-point interest rate increase in May
Worries about an economic downturn, which were also highlighted by the Fed at its March 21 to 22 policy meeting, and concerns about banking sector stress have encouraged markets to price in at least a 25 basis-point cut by the end of 2023.
But a rate cut looks less likely than higher rates in the face of inflation
US two-year Treasury yields, which typically reflect near-term interest rate expectations, have soared nearly 75 basis points in the past month as still-strong data has reduced the prospect of rate cuts.
Nearly 90 per cent – 94 of 105 – of the economists who participated in the latest Reuters poll predicted that the Fed would hike its key policy rate by 25 basis points to the 5 per cent to 5.25 per cent range at its May 2 to 3 meeting, in line with market pricing.
Beyond that, 59 of 100 economists expected the Fed to keep its policy rate unchanged throughout at least 2023. Only 26 respondents with an end-2023 view forecast a cut, similar to market expectations.
“On the data front, despite the slowdown in inflation in March, there is still a lot more work to be done to get back to the 2 per cent target,” said Dr Michael Gapen, who is chief US economist at BofA Securities.
“We maintain the first rate cut in March 2024. Should the stresses in the financial system be reduced in short order, we cannot rule out that stronger macro data will lead the Fed to put in additional hikes beyond May.”
In an exclusive interview with Reuters this week, St Louis Fed president James Bullard called for a much higher peak policy rate than currently expected, as inflation remained stubbornly high.
Inflation was not forecast to fall to the central bank’s target until at least 2025, and 26 of 35 respondents said the bigger risk was that it would be higher in 2023 than they expected.
The unemployment rate was expected to rise from its current 3.5 per cent level to 4.3 per cent by the end of 2023 and average at 4.5 per cent in 2024, still historically low compared with previous recessions, keeping upward pressure on sticky price rises.
But a recession might impede the Fed’s ability to take rates much higher, especially as many of the previous rate rises have not yet filtered into the economy.
Thirty-seven of 47 respondents to an additional question said there would be a US recession in 2023, of which 31 said it would be short and shallow. Four said it would be long and shallow, while two characterised it as deep.
The poll found forecast growth of only 1.1 per cent in 2023 and 0.8 per cent in 2024. REUTERS
