BENGALURU, Nov 18 (Reuters) – The Federal Reserve is set to delay a rate hike by 50 basis points in December, but economists polled by Reuters say a prolonged period of tightening by the US central bank and a higher peak in interest rates are the biggest are risks to the current outlook.
US CPI unexpectedly fell below 8% last month, supporting already established market expectations that the Fed would make smaller rate hikes going forward after four consecutive hikes of 75 basis points.
But the latest Reuters poll shows that inflation forecasts for next year and next are slightly higher than assumed a month ago, suggesting it is not yet time to predict an impending pause in the tightening campaign Fed to consider.
The Fed will cut its federal funds rate by half a percentage point to the 4.25% range at its December 13-14 meeting, according to 78 of 84 economists who took part in a Reuters poll Nov. 14-17. up to 4.50%.
The interest rate, which the Fed raised from near zero in March in one of its fastest rate hike campaigns ever, was widely expected to peak at at least 4.75% to 5.00% early next year, 25 basis points higher than seen so far in last month’s poll. The peak rate predictions ranged from 4.25% – 4.50% to 5.75% – 6.00%.
But 16 out of 28 respondents to an additional question said the greater risk was that rates would peak higher and later than now expected, while another four said higher and earlier. The rest said it would be lower and earlier.
“As markets focus on peak inflation, underlying inflation trends remain in place. This could force the Fed to hike the federal funds rate well into next year and beyond currently expected levels,” said Philip Marey, senior US -Strategist at Rabobank.
Several Fed policymakers have signaled that rates would rise higher than their September forecasts and they would need to see a steady and meaningful decline in rate hikes to consider pausing the tightening as core CPI more than tripled achieved its target of 2%.
While price pressures gradually eased, inflation, as measured by the CPI and the personal consumption expenditure (PCE) price index, did not return to 2% until at least 2025.
A majority of economists, 18 out of 29, also said the bigger risk is that price increases over the next six months will be larger than expected.
“While the softer (CPI) report will support the Fed’s desire to slow the pace of rate hikes to 50 basis points in December, we see no clear evidence in the report that inflation is convincingly moving towards the 2% Ziels will slow,” noted Andrew Hollenhorst, US chief economist at Citigroup.
“The weaker reading does not materially impact the upside potential we see for inflation.”
The most aggressive tightening cycle in four decades has left a 60% chance of a US recession within a year, according to the survey, roughly in line with last month’s survey.
While 22 out of 30 economists said the recession was likely to be shallow – the economy as a whole is expected to grow just 0.4% next year – fears of a deeper downturn have prompted companies to shed thousands of jobs across the country.
The unemployment rate was expected to rise from 3.7% currently to 4.6% by the end of next year – with the highest forecast at 5.9% – and to average 4.8% in 2024, which is still well below the level of previous recessions. Unemployment rate forecasts were broadly higher compared to last month’s survey.
“Despite a potentially modest rise in unemployment over the next year, the economy will most likely be in recession, which will put the Fed in the unusual position of maintaining a hawkish policy stance during an economic downturn,” said Michael Moran, chief economist at Daiwa Capital Markets America, which had one of the highest rate forecasts in the poll.
(For other stories from Reuters Global Business Survey:)
Reporting by Prerana Bhat; Additional reporting by Indradip Ghosh; Analysis by Sarupya Ganguly; Survey by Milounee Purohit and Dhruvi Shah; Edited by Ross Finley and Paul Simao
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