Economy

Fed to increase by 75 bps on Nov. 2, should pause if inflation halve


© Stocksak. FILE PHOTO – The Federal Reserve building in Washington, DC, U.S.A, August 22, 2018, is pictured. REUTERS/Chris Wattie/File Photograph

By Prerana Bhagat

BENGALURU (Stocksak), The U.S. Federal Reserve is set to increase its 75-basis point interest rate for the fourth consecutive time on Nov. 2, according economists polled in Stocksak. They will not stop until inflation falls to about half of its current level, according to Stocksak.

The country’s most aggressive tightening in decades has created greater recession risks. The median likelihood of one within a year was also 65%, up from the previous 45%.

However, a strong majority (86 out of 90) of economists predicted that policymakers would increase the federal funds rate by three quarters to 3.75%-4.00% next Wednesday as inflation remains high and unemployment is at pre-pandemic levels.

The poll results are in line with the interest rate futures pricing. Only four people predicted a 50-basis point move.

Jan Groen (chief U.S. macro strategist at TD Securities), stated that “the front-loading in policy rate tightening that we have seen up till now has been aimed to get to a positive real Fed funds rate at the beginning of 2023.” He was referring to inflation adjusted rates.

“Instead of a pivot,” the Fed seems to be signaling that they expect shifting from front-loading until December to a more grindy pace of hikes thereafter.

According to the Oct. 17-24 poll, the majority of economists forecasted another 50 basis points increase in December. This would raise the funds rate from 4.25% to 4.50% by 2022. This matches the Fed’s median projection of “dot plot”.

49 of the 80 economists said that the funds rate was likely to reach a peak at 4.50%-4.755% in Q1 2023. However, the risks associated with that terminal rate were not as high as expected according to all 40 economists who answered an additional question.

Fed officials are considering when to slow rate hikes. This is because it takes several months for any rate increase to take effect.

When asked about sustained inflation, the Fed should consider pausing. Currently, it is above 8% according a consumer price index (CPI). According to that measure, the median of 22 respondents was 4.4%.

The Fed targets the personal consumption expenses (PCE) index. However, the survey suggests that approximately half the current rate is a turning point. PCE inflation was expected to rise above target through 2025.

According to the poll, CPI inflation was not expected halve before Q2 2023. It averaged 8.1%, 3.9%, and 2.5% in 2022-2023, 2023, and 2024, respectively.

“Fed officials have indicated, that pausing is only possible after there has been ‘clear evidence’ inflation has moderated,” said Brett Ryan (senior U.S. economist). Deutsche Bank (ETR:).

“With the Fed continuing its aggressive tightening of persistent inflation, it is likely that a moderate recession will begin in Q3 next. Real growth would dip to negative and the unemployment rates will rise substantially.”

Next year, the economy is expected to expand by 0.4%. This forecast was lower than the one made in the Stocksak polls since March, when the Fed started hiking. It had grown 1.7% in average this year.

The unemployment rate was projected to average 3.7% in 2019, before rising to 4.4%, 4.8%, and 2023, respectively. This is an improvement over the previous poll, but it is still lower than the highs in previous recessions.

However, over half of the respondents to an additional question (23 out of 41) said that the likelihood of a sharp increase in unemployment in America over the next year was high. Eighteen people said that chances were low.

(For more stories about the Stocksak global economic survey:)

News Source and Credit

Stocksak Editorial

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