The Fed’s last rate hike will come at the July meeting, economists say

BENGALURU: The US Federal Reserve will raise its benchmark overnight interest rate by 25 basis points to the 5.25%-5.50% range on July 26, according to all 106 economists polled by Reuters, with a majority still saying that will be the case increasing the current tightening cycle.

A resilient economy and historically low unemployment in the year since the Fed began one of its most aggressive rate-hiking campaigns in history have repeatedly confounded analysts and investors. .

Inflation is easing, with the headline consumer price index (CPI) slowing to 3.0% in June from 4.0% in May. That has led many Wall Street observers to conclude that inflation may soon be tamed, prompting some to renew bets that rate cuts could occur by the end of 2023.

The current debate is whether more rate hikes might be necessary to ensure “disinflation” continues or whether doing more might cause unnecessary damage to the economy.

But underlying inflation remained sticky and Fed Chair Jerome Powell and other central bank officials said more tightening was coming, even as they decided to pause rate hikes at last month’s policy meeting. .

The view that rates will remain higher for longer appears to be gaining traction, with the share of respondents surveyed during the July 13-18 period predicting at least one rate cut by the end of March in next year sharply to 55% from 78% last month.

“For the Fed, despite the soft CPI print, we still expect a hike in July … (and) while we hope that the softness in inflation continues, it is unwise from a standpoint of policymaking to bank on that,” said Jan Nevruzi, US rates strategist at NatWest Markets.

“We don’t want to rush and say that the fight against inflation is won, because we’ve seen head-fakes in the past.”

Economists and financial market traders appear to still be slightly out of step with the Fed.

The latest “dot-plot” projections from members of the central bank’s policy-setting Federal Open Market Committee suggest the benchmark overnight interest rate will rise to 5.50%-5.75%, but only 19 out of 106 economists polled by Reuters predict that will be reached. range.

Expectations that the Fed will soon end its hiking cycle pushed the dollar to its lowest level in more than a year against major currencies. A weak greenback is likely to make imports more expensive and keep price pressures up.

In fact, economists are still concerned that inflation may not come down quickly enough.

Core inflation, which strips out food and energy prices, will decline only slightly or remain around current levels of less than 5% by the end of the year, 20 of 29 respondents to an additional poll question said. .

The Fed is targeting inflation, as measured by the personal consumption expenditures index (PCE), for its 2% target. Core PCE was last reported at 3.8% for May.

But none of the inflation measures analyzed by Reuters – CPI, core CPI, PCE and core PCE – are expected to reach 2% until 2025 at the earliest.

“While the latest numbers are encouraging, the real battle begins now, as the easy base effect is now behind us,” said Doug Porter, chief economist at BMO Capital Markets, referring to the fact that Inflation was strong in June because it was so high at the same time last year.

“As the disinflationary force of lower energy prices fades, that will leave us dealing with the underlying 4% trend in the core … (and) to truly crack core will likely require a more significant economic slowdown.”

The strong labor market is expected to ease only slightly, raising the unemployment rate to 4.0% from the current 3.6% by the end of 2023, the poll showed.

A slight majority of economists who answered an additional question, 14 of 23, said wage inflation will be the stickiest component of core inflation.

Nearly two-thirds of respondents to a separate question, 27 out of 41, expect a US recession within the next year, with 85% of them saying it will begin at some point in 2023.

However, the economy is expected to grow by 1.5% this year, up from the 1.2% forecast a month ago, and then slow to 0.7% next year. – Reuters

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