According to the majority of economists surveyed by Reuters, who predict no reduction in interest rates by year's end, the US Federal Reserve will increase interest rates at least twice more in the upcoming months, with the possibility that they will rise even further.
Due to the majority of private sector forecasters now agreeing with the central bank's own predictions and messaging, only financial market participants are holding onto the hope that interest rates will begin to decline later this year.
Fed policymakers, including Fed chair Jerome Powell, have reiterated a higher-for-longer mantra that market traders have been fighting for months as a result of significantly stronger than anticipated U.S. jobs data earlier this month.
In the Feb. 8–13 Reuters poll, 46 of 86 economists predicted the Fed would raise interest rates twice, by 25 basis points each time, to reach its 2.0% target for inflation rather than just once, in March.
Accordingly, the peak would be between 5.00% and 5.25%, which is 25 basis points higher than what most forecasters had anticipated since November. The Fed Funds Rate would peak even higher, according to all 37 respondents to an additional question.
"We currently expect two more hikes...But the risk is towards higher rates. The labor market remains strong and it's going to take a bit more time for it to start showing signs of deterioration," said Oscar Munoz, U.S. macro strategist at TD Securities, who changed his forecast last month.
"That puts the risk of keeping services inflation and wage growth elevated for quite a bit and that's going to filter back into inflation. That means the Fed is going to keep the policy rate at high levels for quite a bit longer."
Later on Tuesday, the most recent U.S. inflation data is scheduled for release, which could slightly alter the rate outlook.
According to a separate Reuters survey, the consumer price index (CPI) is anticipated to have increased 0.5% on the month in January, with the core index—which excludes food and energy—increasing 0.4%. These come after December readings that were a bit softer.
By the end of 2023, there was no definite agreement on the Fed's policy rate. But 54 of the 80 respondents to the most recent survey, or more than two-thirds, predicted no reduction this year because they believed that inflation would continue to rise at least through 2024.
Of those 54 economists, 18 predicted that the fed funds rate would peak between 4.75% and 5.00% and remain there for the rest of the year. Out of the remaining 80 economists, 26 anticipated at least one cut by that time.
In addition, the poll found that the likelihood of a recession in the upcoming year was on average 60%, up from 56% in January.
But until 2024, that won't be sufficient to cause rate reductions.
"Cutting shortly after an unsettling inflation surge with a still-tight labor market would risk reputational damage if inflation flared back up," said David Mericle, chief U.S. economist at Goldman Sachs.
"The (Fed) needs to keep the economy on a below-potential growth path for a while longer in order to further rebalance the labor market and create the conditions for inflation to settle sustainably at 2%."
The largest economy in the world was predicted to expand by just 0.7% this year before bouncing back to 1.2% growth in 2024, which is still significantly below its long-term average of roughly 3%.
The unemployment rate, which was predicted to increase to 4.8% in Q1 2024 from its current low point of 1969, when most economists anticipated at least one rate cut. In contrast to prior recessions, however, that rate would be very low.
Of the 35 economists polled, 21 said a significant drop in inflation was more likely to force a rate cut, while 14 said a significant increase in unemployment was more likely to do so.
(Source:www.reuters.com)
Due to the majority of private sector forecasters now agreeing with the central bank's own predictions and messaging, only financial market participants are holding onto the hope that interest rates will begin to decline later this year.
Fed policymakers, including Fed chair Jerome Powell, have reiterated a higher-for-longer mantra that market traders have been fighting for months as a result of significantly stronger than anticipated U.S. jobs data earlier this month.
In the Feb. 8–13 Reuters poll, 46 of 86 economists predicted the Fed would raise interest rates twice, by 25 basis points each time, to reach its 2.0% target for inflation rather than just once, in March.
Accordingly, the peak would be between 5.00% and 5.25%, which is 25 basis points higher than what most forecasters had anticipated since November. The Fed Funds Rate would peak even higher, according to all 37 respondents to an additional question.
"We currently expect two more hikes...But the risk is towards higher rates. The labor market remains strong and it's going to take a bit more time for it to start showing signs of deterioration," said Oscar Munoz, U.S. macro strategist at TD Securities, who changed his forecast last month.
"That puts the risk of keeping services inflation and wage growth elevated for quite a bit and that's going to filter back into inflation. That means the Fed is going to keep the policy rate at high levels for quite a bit longer."
Later on Tuesday, the most recent U.S. inflation data is scheduled for release, which could slightly alter the rate outlook.
According to a separate Reuters survey, the consumer price index (CPI) is anticipated to have increased 0.5% on the month in January, with the core index—which excludes food and energy—increasing 0.4%. These come after December readings that were a bit softer.
By the end of 2023, there was no definite agreement on the Fed's policy rate. But 54 of the 80 respondents to the most recent survey, or more than two-thirds, predicted no reduction this year because they believed that inflation would continue to rise at least through 2024.
Of those 54 economists, 18 predicted that the fed funds rate would peak between 4.75% and 5.00% and remain there for the rest of the year. Out of the remaining 80 economists, 26 anticipated at least one cut by that time.
In addition, the poll found that the likelihood of a recession in the upcoming year was on average 60%, up from 56% in January.
But until 2024, that won't be sufficient to cause rate reductions.
"Cutting shortly after an unsettling inflation surge with a still-tight labor market would risk reputational damage if inflation flared back up," said David Mericle, chief U.S. economist at Goldman Sachs.
"The (Fed) needs to keep the economy on a below-potential growth path for a while longer in order to further rebalance the labor market and create the conditions for inflation to settle sustainably at 2%."
The largest economy in the world was predicted to expand by just 0.7% this year before bouncing back to 1.2% growth in 2024, which is still significantly below its long-term average of roughly 3%.
The unemployment rate, which was predicted to increase to 4.8% in Q1 2024 from its current low point of 1969, when most economists anticipated at least one rate cut. In contrast to prior recessions, however, that rate would be very low.
Of the 35 economists polled, 21 said a significant drop in inflation was more likely to force a rate cut, while 14 said a significant increase in unemployment was more likely to do so.
(Source:www.reuters.com)
