The Fed plans to signal a further hike and eliminate rate cuts for 2024

By | September 15, 2023

(Bloomberg) — The resilience of the U.S. economy will push the Federal Reserve to raise interest rates further this year and stay at the peak level next year longer than previously expected, according to economists surveyed from Bloomberg News.

Most read by Bloomberg

The Federal Open Market Committee will keep rates stable in the 5.25% to 5.5% range at its Sept. 19-20 meeting, the survey showed, and will remain there until the first cut next May, two months later than economists forecast in July. .

Policymakers are likely to forecast a further rate hike this year in the so-called dot plot contained in their quarterly summary of economic projections, as they improve their view of the U.S. economic outlook. However, economists surveyed believe the Fed will not proceed with a definitive increase.

Fed Chair Jerome Powell and his colleagues have signaled plans to suspend increases this month as they slow their tightening campaign and move closer to peaking rates. Powell said last month at the Kansas City Fed conference in Jackson Hole, Wyoming, that the inflation rate remains too high and that central bankers are prepared to tighten further if necessary.

A robust economy is shaping the September meeting discussion. The median member of the committee will likely see economic growth this year at 2%, double the 1% forecast in June and compared to the 0.4% recorded in March. Additionally, they are likely to expect a hotter job market, with the unemployment rate, now at 3.8%, rising 0.1 point to 3.9%, or lower than the 4.1% rate recorded in June and 4.5% in March.

“The most interesting element may be views on future rate hikes,” said Joel Naroff, president of Naroff Economics LLC, in a survey response. “What we have no idea is what level of federal funding is considered too high.”

The forecast is expected to include the committee’s first look at 2026, when the average politician will likely see rates at 2.6% by the end of that year, slightly above the long-term rate, which is estimated at 2.5 %.

In its forecasts, the committee should continue to consider the inflation rate high, with an end-of-year projection of 3.2%. The outlook for underlying core inflation, excluding food and energy, improved slightly to 3.8%. Economists expect policymakers to reach the 2% inflation target in 2026.

The survey of 46 economists was conducted Sept. 11-14.

What Bloomberg’s economics says…

“Bloomberg Economics expects the FOMC to keep rates at 5.5% at its September 19-20 meeting, something that Fed officials – even the most hawkish ones – have telegraphed well in advance. The clues offered by the FOMC on the future trend of rates will be more important. Positive economic surprises during the inter-meeting period will likely lead officials to sharply revise upwards their GDP growth forecasts, while reducing core inflation.”

– Anna Wong, chief US economist

Economic data has broadly surprised to the upside in recent months, meaning central bankers will need to keep rates higher for longer to reduce price pressures as they try to get inflation back to their 2% target. But most don’t expect the need for another excursion.

“The Fed is and should take some comfort from the overall deceleration in inflation and wage growth,” said Kathy Bostjancic, chief economist at Nationwide Life Insurance Co. The Fed and Chair Powell are likely to take an aggressive approach ”.

In July the FOMC raised the key rate to a range between 5.25% and 5.5%, a 22-year high. While the committee expects a further increase in its forecast, economists are divided on whether this will happen, with about a quarter expecting further tightening.

“Core inflation remains abnormally high and the economy is doing better than many analysts expected,” said Dennis Shen, senior director at Scope Ratings. “The risk for the Federal Reserve is doing too little, rather than doing too much.”

Economists have gradually become more optimistic about the outlook for the U.S. economy, with 45% predicting a recession in the next 12 months, up from 58% in July and 67% in April. Fed officials shared optimism of a soft landing, with Fed staff moving from a recession expected at the start of the year to continued expansion.

Almost all economists expect the guidelines contained in the declaration to be maintained, while the committee hints at the possibility of further tightening.

The FOMC will continue to shrink the balance sheet by not replacing maturing bonds, and economists expect this to continue even after rate cuts begin. The median economist expects the budget to fall to $7.8 trillion by December and to $6.8 trillion by 2025.

Most read by Bloomberg Businessweek

©2023 Bloomberg LP

Leave a Reply

Your email address will not be published. Required fields are marked *