Fed to raise interest rates by 75 basis points in July and 50 bps in September – Reuters poll

The Federal Reserve Building is seen before the Federal Reserve Board flags plans to raise interest rates in March as it focuses on fighting inflation in Washington, USA, January 26, 2022. REUTERS/Joshua Roberts/File Photo

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BENGALURU, June 22 (Reuters) – The Federal Reserve will make another 75 basis point interest rate hike in July, followed by a half-percentage-point hike in September, and will not cut to quarter-percentage-point moves until November, at the very least, according to economists polled by Reuters.

Last week, the Fed raised the federal funds rate by three-quarters of a percentage point, its biggest increase since 1994, after official data a few days earlier showed inflation unexpectedly rose despite expectations it had peaked. see More information

The latest poll results, released Wednesday before Fed Chair Jerome Powell appeared before the Senate Banking Committee as part of his biannual monetary policy testimony to Congress, show that momentum is still behind the central bank. of the US to do more, not less, despite growing concerns about the recession and a sharp sell-off in financial markets. Bond yields have risen sharply and Wall Street’s major stock indices are already trading in a bear market, defined as 20% below their peak.

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In the June 17-21 Reuters poll, nearly three-quarters of economists, 67 out of 91, had expected another 75 basis point hike in US rates in July. That would take the federal funds rate to a range of 2.25% to 2.50%, roughly the neutral level at which the Fed expects the economy to be neither stimulated nor constrained.

A strong majority expects the central bank to raise its key rate by another 50 basis points in September, with more divided opinions on whether it will increase by 25 or 50 basis points in November. Most expect the Fed to raise rates by 25 basis points at its December meeting.

That would take the federal funds rate to a range of 3.25% to 3.50% by the end of this year, 75 basis points higher than thought in a survey published just two weeks ago.

Powell last week signaled that a break from the current tightening cycle would only be possible after a significant decline in inflation, which currently appears to be a more distant prospect than was thought just a few weeks ago.

“As the Fed is still downplaying the inflation problem … not recognizing that a price and wage spiral has already begun, we expect them to have to raise rates faster than they now expect,” wrote Philip Marey, senior US strategist. at Rabobank. in a note.

“Unfortunately, the walking path is also likely to be followed by a recession.”

Reuters Poll- Outlook for US economy and federal funds rate

Inflation will remain above the Fed’s 2% target until at least 2025, according to its own projections and a separate Reuters poll.

While the Fed was expected to cut to 25 basis points in November, a significant minority, about 40%, expected a 50 basis point increase at that month’s meeting. Only a handful said the Fed would halt its rate hikes sometime this year.

About three-quarters of respondents, 68 out of 91, saw the year-end rate at 3.25%-3.50% or higher, in line with the Fed’s own dot plot showing policymakers’ projections. .

Aggressive rate hikes come with their own risks, as reflected in the Fed’s economic forecasts, where forecasts for the US unemployment rate rose significantly and economic growth was forecast to average below trend.

The survey only predicted a 25 basis point increase in the first quarter of next year, pushing the federal funds rate to 3.50%-3.75%, the possible terminal rate.

The Fed was expected to take a break in the second and third quarters of 2023 and cut rates by 25 basis points in the last quarter of next year, according to the median forecast of a smaller sample. But forecasts for where the federal funds rate will be by the end of 2023 ranged from 2.50%-2.75% to 4.25%-4.50%, underscoring high uncertainty.

Despite Powell saying the Fed was not trying to induce a recession, some primary traders have started to predict one as early as this year or anticipate their recession calls.

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Reporting by Prerana Bhat and Indradip Ghosh; Research by Swathi Nair and Susobhan Sarkar; Edited by Paulo Simon

Our Standards: The Thomson Reuters Trust Principles.

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