Daily Management Review

Poll Shows US Fed Likely To Maintain Its July Rate Hike Of 75 Basis Points; A 40% Likelihood Of A Recession Predicted


Poll Shows US Fed Likely To Maintain Its July Rate Hike Of 75 Basis Points; A 40% Likelihood Of A Recession Predicted
The Federal Reserve of the United States will choose for another 75 basis point rate hike rather than a greater move at its meeting next week to combat stubbornly high inflation, according to a Reuters poll of analysts, as the likelihood of a recession over the next year rises to 40%.
Inflation reached 9.1 per cent in June, a four-decade high, fueling hopes that the Fed, which had just recently switched gears from 50 to 75 basis points at the last meeting, would act even more firmly and seek a 100 basis point raise. 
However, some of the more aggressive Fed officials have advocated for a 75 basis point raise in public remarks, dampening expectations in recent days. The 75 basis point increase last month was the first since 1994.
According to the July 14-20 Reuters survey, 98 of 102 economists predict the Fed to raise rates by 75 basis points to 2.25 per cent -2.50 percent at the end of the July 26-27 meeting. The remaining four forecast a 100 basis point increase.
Fed funds futures are pricing only around a one-in-five possibility of a full percentage point raise, which is consistent with poll results.
However, what is already the most aggressive rate hike path in decades raises the prospect of a recession.
According to the newest poll, there is a 4 per cent risk of a U.S. recession in the following year, with a 50 per cent possibility of one occurring within the next two years. This was a big improvement from the 25 per cent and 40 per cent reported in June.
"There seems to be an inflation tax on the consumer and that continues to build up and take its toll and eventually pushes the economy into a mild recession," said Aditya Bhave, senior U.S. economist at Bank of America Securities.
Over 90 per cent, or 47 of 51 respondents, predicted that any prospective recession would be mild or extremely mild. Only four people predicted it would be severe.
Meanwhile, the poll showed that a slowdown in GDP, and hopefully inflation, would push the Fed to reduce the magnitude of future rate hikes.
The Fed is expected to slow to 50 basis points in September and then rise by only 25 basis points in November and December. These opinions stayed essentially unchanged from the previous poll.
Over 80 per cent of respondents, 82 out of 102, expected the fed funds rate to be 3.25 per cent -3.50 per cent or higher by the end of the year.
There was no change in where or when the Fed would cease hiking rates, which were predicted to be 3.50 per cent -3.75 per cent in Q1 2023.
Nonetheless, price pressures were likely to continue significant and beyond the Fed's target rate of 2 per cent in the coming years. Inflation, as assessed by the Consumer Price Index, is expected to average 8.0 per cent in 2022, 3.7 per cent in 2023, and 2.5 per cent in 2024, respectively.
The unemployment rate is expected to average 3.7 per cent this year before rising to 4.0 per cent in 2023 and 4.1 per cent in 2024. That is still low by historical standards and much below the highs seen around the beginning of the pandemic-induced recession in 2020.
Meanwhile, economic growth projections have been revised downward across the board. Following a surprising decline in Q1 2022, growth for Q2 is expected to be only 0.7 per cent seasonally adjusted annualised, down from the 3.0 per cent forecast last month. More than one-fifth projected further downturn.
GDP growth has been reduced from 2.6 per cent predicted last month to 2.0 percent this year, and virtually halved to 1.2 per cent by 2023, when the full impact of the Fed's rate rises is felt.