Fed to hike rate by 75 basis points again on Nov 2, should pause when inflation halves: Economists

US Federal Reserve officials have begun contemplating when they should slow the pace of interest rate increases as they take stock of their impact. PHOTO: REUTERS

BENGALURU – The United States Federal Reserve will go for its fourth consecutive 75-basis point interest rate increase on Nov 2, according to economists polled by Reuters, who said the central bank should not pause until inflation falls to around half its current level.

Its most aggressive tightening cycle in decades has brought with it ever bigger recession risks. The survey also showed a median 65 per cent probability of one within a year, up from 45 per cent.

Still, a strong majority of economists, 86 of 90, predicted that Fed policymakers will raise the federal funds rate by three-quarters of a percentage point to 3.75 per cent to 4 per cent next week as inflation remains high and unemployment is near pre-pandemic lows.

Results in the poll are in line with pricing for interest rate futures. Only four respondents predicted a 50-basis point move.

“The front-loading of policy rate tightening we have seen up to now has been aimed at getting to a positive real Fed funds rate at the start of 2023,” said TD Securities chief US macro strategist Jan Groen, on rates adjusted for inflation.

“Instead of a pivot, in our view, the Fed is signalling that it foresees shifting from front-loading up to December towards more of a more grinding pace of hikes from then onwards.”

A majority of economists in the Oct 17 to 24 poll forecast another 50-basis point increase in December, taking the funds rate to 4.25 per cent to 4.5 per cent by end-2022. This matches the Fed’s “dot plot” median projection.

Fed officials have begun contemplating when they should slow the pace of rate increases as they take stock of the impact, given that it takes many months for any rate move to take effect.

Asked around what level of sustained inflation the Fed should consider pausing – currently running above 8 per cent, according to the consumer price index (CPI) – the median from 22 respondents said 4.4 per cent, according to that measure.

CPI inflation was not expected to halve until the second quarter of 2023, according to the poll, averaging 8.1 per cent in 2022, 3.9 per cent in 2023 and 2.5 per cent in 2024.

“Fed officials have indicated that pausing is only possible after ‘clear and compelling’ evidence that inflation has moderated,” said Deutsche Bank senior US economist Brett Ryan. “With the Fed continuing its aggressive tightening to rein in persistent inflation, we expect a moderate recession likely to begin in Q3 next year as the real growth would dip negative and the unemployment rate would rise substantially.”

The economy was expected to expand just 0.4 per cent in 2023 – a forecast that has been downgraded in each consecutive monthly Reuters poll since the Fed first started raising rates in March – after growing 1.7 per cent on average in 2022.

The unemployment rate was expected to average 3.7 per cent in 2022 before rising to 4.4 per cent and 4.8 per cent in 2023 and 2024, respectively, an upgrade from the previous poll but significantly lower than the highs seen in previous recessions.

Still, the chances of a sharp rise in US unemployment over the coming year were high, according to more than half of respondents – 23 of 41 – to an additional question. Eighteen said the chances were low. REUTERS

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