Fed to hike by 75 bps again on Nov. 2, should pause when inflation halves

By Prerna Bhat

BENGALURU (Reuters) – The U.S. Federal Reserve will raise interest rates for the fourth consecutive 75 basis points on Nov. 2, according to economists polled by Reuters, who said the central bank should hold off until inflation falls to about half its current level. not .

Its most aggressive tightening cycle in decades brings with it major risks of recession. The survey showed an average 65% chance of one in a year, up from 45%.

Still, a majority of economists, 86 out of 90, predict policymakers will raise the federal funds rate by three-quarters of a percentage point next week to 3.75%-4.00% as inflation remains high and unemployment near pre-pandemic lows.

Poll results are consistent with interest rate futures pricing. Only four respondents predicted a move of 50 basis points.

“The policy rate front-loading we’ve seen so far was aimed at getting a positive real Fed funds rate as early as 2023,” said Jane Grown, chief U.S. macro strategist at TD Securities, referring to the adjusted rate. for inflation.

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“Rather than a pivot, in our view, the Fed is signaling that they foresee a shift from front-loading through December, to a more grinding pace going forward from then on.”

Most economists polled Oct. 17-24 had forecast a 50 basis point hike in December, taking the funds rate to 4.25%-4.50% by the end of 2022. It matches the Fed’s “dot plot” central projection.

According to 49 out of 80 economists, the funds rate was expected to peak at 4.50%-4.75% or higher in Q1 2023. But all but one in 40 who answered an additional question said those terminal rate risks were on the upside.

Fed officials have begun considering when they should slow the pace of rate hikes as they take stock of their impact since any rate move takes several months to take effect.

Asked around what level of persistent inflation the Fed should consider pausing — currently running above 8% according to the consumer price index (CPI) — the average of 22 respondents said 4.4%, according to that measure.

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The Fed targets the personal consumption expenditure (PCE) index, but surveys suggest that the turning point should be about half the current rate of inflation. PCE inflation was forecast to remain above target until at least 2025.

CPI inflation was not expected to halve until Q2 2023, according to the poll, averaging 8.1%, 3.9% and 2.5% in 2022, 2023 and 2024 respectively.

“Fed officials have indicated that a pause is possible only after ‘clear and compelling’ evidence that inflation has moderated,” said Brett Ryan, senior US economist at Deutsche Bank.

“With the Fed continuing its aggressive tightening stance to rein in persistent inflation, we expect a moderate slowdown likely to begin in Q3 next year as real growth turns negative and the unemployment rate rises significantly.”

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The economy was expected to expand just 0.4% next year – after an average growth of 1.7% this year – a forecast downgraded in each consecutive monthly Reuters poll since the Fed began hiking in March.

The unemployment rate is expected to average 3.7% this year before rising to 4.4% and 4.8% in 2023 and 2024, respectively, an upgrade from previous polls but significantly lower than the high levels seen in previous recessions.

Still, the chances of a sharp increase in unemployment in the United States in the coming year were high, according to more than half of respondents to the additional question, 23 out of 41. Eighteen said the chances were low.

(For other stories on the Reuters Global Economic Poll 🙂

(Reporting by Prerna Bhat; Additional reporting by Indradeep Ghosh; Polling by Dhruvi Shah, Vijayalakshmi Srinivasan and Mumal Rathore; Editing by Hari Kishan, Ross Finley and Andrea Ricci)

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