Policymakers have done little to push back on market pricing for a third consecutive rate hike of three-quarters of a percentage point at the U.S. central bank’s Sept. 20-21 meeting, with inflation, as measured by the Fed’s preferred gauge, running at more than three times its 2% target.
A strong majority of economists, 44 of 72, predicted the central bank would hike its fed funds rate by 75 basis points next week after two such moves in June and July, compared to only 20% who said so just a month ago.
The shift in expectations for the larger hike has pushed the dollar to a two-decade high against a basket of currencies. The U.S. currency was forecast to extend its dominance for the remainder of this year and into early next.
“If there has been a shift in the Fed’s tone in recent months, it has been in the direction of a stronger commitment to reducing inflation, even at the risk of a downturn,” noted Michael Gapen, chief U.S. economist at Bank of America Securities, who was among those polled.
Like many others in the poll, Gapen recently changed his forecast to show the Fed hiking rates by 75 basis points next week instead of half of a percentage point.
But raising borrowing costs so quickly comes with its own risks. The poll put the probability of a U.S. recession over the coming year at 45%, unchanged from the previous forecast, with the chance of one occurring over the next two years rising to 55% from 50%.
The world’s No. 1 economy, which has seen its gross domestic product contract in the past two quarters, was expected to grow below its long-term average trend of 2% until at least 2025, according to the poll.
Economists said the interest rate outlook for the September meeting could change if inflation drops. The U.S. Labor Department is due to release consumer price index data on Tuesday, with economists polled by Reuters forecasting the CPI would rise 8.1% in the 12 months through August. The CPI jumped 8.5% in the 12 months through July.
Whether or not the Fed slows its monetary tightening, either through a 50- or 25-basis-point hike at its Nov. 1-2 policy meeting, is on a knife’s edge, the poll showed. A majority of the economists, however, expected the central bank to opt for a 25-basis-point hike at its Dec. 13-14 meeting.
There was still no consensus among economists on where and when the Fed will stop hiking rates, and similarly there was no consensus on when it would start cutting them.
Among the economists who had a view through the end of 2023, 47% forecast at least one rate cut, down from 57% in a poll last month.
Once the fed funds rate reaches a peak, the central bank is more likely to leave it unchanged for an extended period rather than cut it quickly, according to more than 80% of respondents who answered an additional question.
Fed Chair Jerome Powell has said he and his fellow policymakers will raise rates as high as needed and would keep them there “for some time” to bring inflation down to the 2% target.
“We just don’t see the Fed cutting rates next year, it would be too soon. They won’t have enough evidence inflation is on a sustained downward course towards the target,” said Sal Guatieri, senior economist at BMO Capital Markets, who also was among those polled.
While inflation, as measured by CPI, was forecast to average 8.0% and 3.7% this year and in 2023, respectively, a tight labor market was expected to underpin price pressures, according to the poll.
The U.S. jobless rate, which rose to 3.7% in August from 3.5% in July, was forecast to average 3.7% this year before climbing to 4.2% in 2023 and 2024.
However, the unemployment rate needs to go significantly higher to bring inflation down to 2%, according to 16 of 30 respondents to an additional question who gave a median jobless rate of 5%. The other 14 said it did not need to rise significantly.
“The claim wage pressures can be reduced … without substantially increasing unemployment is wishful thinking on the Fed’s part,” said Philip Marey, senior U.S. strategist at Rabobank, who was among those polled.