The U.S. Federal Reserve will head for another 75 basis point rate hike rather than a greater move at its meeting next week to combat stubbornly high inflation, according to a Reuters poll of analysts, as the likelihood of a recession over the next year rises to 40%.
Inflation reached 9.1 percent in June, a four-decade high, fueling hopes that the Fed, which had just recently switched gears from 50 to 75 basis points at the last meeting, would act even more firmly and seek a 100 basis point raise.
However, some of the more aggressive Fed officials have advocated for a 75 basis point raise in public remarks, dampening expectations in recent days. The 75 basis point increase last month was the first since 1994.
According to the July 14-20 Reuters survey, 98 of 102 economists predict the Fed to raise rates by 75 basis points to 2.25 percent -2.50 percent at the end of the July 26-27 meeting. The remaining four forecast a 100 basis point increase.
Fed funds futures are pricing only around a one-in-five possibility of a full percentage point raise, which is consistent with poll results.
However, what is already the most aggressive rate hike path in decades raises the prospect of a recession.
According to the newest poll, there is a 40% risk of a U.S. recession in the following year, with a 50% possibility of one occurring within the next two years. This was a big improvement from the 25% and 40% reported in a June poll.
The Fed is expected to slow to 50 basis points in September and then rise by only 25 basis points in November and December. These opinions stayed essentially unchanged from the previous poll.
Over 80% of respondents, 82 out of 102, expected the fed funds rate to be 3.25 percent -3.50 percent or higher by the end of the year. There was no change in where or when the Fed would cease hiking rates, which were predicted to be 3.50 percent -3.75 percent in Q1 2023.
Nonetheless, price pressures were likely to continue significant and beyond the Fed’s target rate of 2% in the coming years. Inflation, as assessed by the Consumer Price Index, is expected to average 8.0 percent in 2022, 3.7 percent in 2023, and 2.5 percent in 2024, respectively.
The unemployment rate is expected to average 3.7 percent this year before rising to 4.0 percent in 2023 and 4.1 percent in 2024. That is still low by historical standards and much below the highs seen around the beginning of the pandemic-induced recession in 2020.
Meanwhile, economic growth projections have been revised downward across the board. Following a surprising decline in Q1 2022, growth for Q2 is expected to be only 0.7 percent seasonally adjusted annualised, down from the 3.0 percent forecast last month. More than one-fifth projected further downturn.
GDP growth has been reduced from 2.6 percent predicted last month to 2.0 percent this year, and virtually halved to 1.2 percent by 2023, when the full impact of the Fed’s rate rises is felt.
