The Fed will raise rates by 50 basis points, but the key rate could be higher

BENGALURU, Nov 18 (Reuters) – The Federal Reserve will downgrade in December to propose a 50 basis point interest rate hike, but economists polled by Reuters say a longer period of U.S. central bank tightening and a higher policy rate peak are the biggest risks to the current outlook.

U.S. consumer price inflation unexpectedly fell below 8% last month, reinforcing already entrenched market expectations that the Fed would opt for lower rate hikes going forward. after four consecutive increases of 75 basis points.

But the latest Reuters poll shows inflation forecasts for the year ahead and next are slightly higher than thought a month ago, suggesting it is not yet time to consider an impending pause in the Fed’s tightening campaign.

The Fed is expected to raise its federal funds rate by half a percentage point to the 4.25% to 4.50% range at its Dec. 13-14 policy meeting, according to 78 of 84 economists who participated in the survey. a Reuters poll from November 14-17. .

The funds rate, which the Fed raised from near zero in March in one of its fastest rate hikes ever, is widely expected to peak at a low of 4.75% at 5, 00% at the beginning of next year, 25 basis points higher than expected. in last month’s poll. Peak rate forecasts ranged between 4.25% and 4.50% and 5.75% and 6.00%.

But 16 of 28 respondents to an additional question said the biggest risk was that rates would peak higher and later than they now expect, with four others answering higher and earlier. The others said it would be lower and earlier.

“While markets focus on peak inflation, underlying inflation trends are persistent. This could force the Fed to continue raising the fed funds rate into next year and into the next year. beyond currently anticipated levels,” said Philip Marey, senior US strategist at Rabobank.

Reuters poll chart on the risks to your fed funds terminal rate forecast

Several Fed policymakers have signaled that rates will rise from their projections from September and that they would need to see a steady and significant decline in price inflation to consider pausing tightening, with core CPI rising above more three times its target of 2%.

While price pressures were gradually easing, inflation as measured by the CPI as well as the Personal Consumption Expenditure (PCE) price index did not come down to 2% until at least 2025.

A majority of economists, 18 out of 29, also said the biggest risk was that price increases could be bigger than expected over the next six months.

“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 will convincingly slow toward the 2% target,” noted Andrew Hollenhorst, chief U.S. economist at Citigroup.

“The softer reading does not materially affect the upside we see for inflation.”

The most aggressive tightening cycle in four decades resulted in a 60% chance of a U.S. recession within a year, the poll found, about the same as last month.

While 22 out of 30 economists said the recession is likely to be shallow – the economy is expected to grow just 0.4% next year as a whole – fears of a deeper downturn have prompted companies to cut thousands of jobs across the country.

The unemployment rate is expected to rise from the current 3.7% to 4.6% by the end of next year – with the highest forecast at 5.9% – and to 4.8% on average in 2024 , still well below the levels seen in previous recessions. Unemployment rate forecasts were well above those of the previous month’s survey.

“Despite a potentially modest increase in unemployment next year, the economy will most likely be in recession, which will leave the Fed in the unusual position of maintaining tight policy should the economy slow,” said Michael Moran. , chief economist at Daiwa Capital Markets America, which had one of the highest interest rate forecasts in the survey.

Reuters poll – Outlook for the US economy and Federal Reserve rates

(For more stories from the Reuters Global Economic Survey:)

Reporting by Prerana Bhat; Additional reporting by Indradip Ghosh; Analysis by Sarupya Ganguly; Poll by Milounee Purohit and Dhruvi Shah; Editing by Ross Finley and Paul Simao

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Carol N. Valencia