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The Federal Reserve will defy investor expectations and raise interest rates by at least another quarter point, according to a majority of leading academic economists polled by the Financial Times.
More than 40 percent of respondents said they expected the Fed to raise interest rates twice or more from the current reference level of 5.25 to 5.5 percent, a 22-year high.
This is in stark contrast to the sentiment in financial markets, where federal funds futures traders expect the Federal Reserve’s monetary policy framework to be tight enough to control inflation and therefore keep interest rates rising well into 2024 To be able to hold ice.
The survey, conducted in collaboration with the Kent A Clark Center for Global Markets at the University of Chicago Booth School of Business, suggests that completely eliminating pricing pressures and reducing inflation to 2 percent will require higher borrowing costs than market participants currently expect .
“Some of the signals we’re getting are that policies are not as restrictive,” said Julie Smith, a professor of economics at Lafayette College, noting that interest rate-sensitive sectors like the housing market still remained “surprisingly strong” after one had suffered previous hits.
“It doesn’t look like there’s enough consumer pullback to slow the economy, and I think that’s really the problem.”
Of the 40 respondents surveyed between September 13 and 15, about 90 percent believe the Fed has more work to do.
Almost half of the economists surveyed predicted a peak in the key interest rate of 5.5 to 5.75 percent, suggesting another quarter-point increase in interest rates.
Another 35 percent assume that the Fed will raise the key interest rate by two more quarter points, bringing it to 5.75 to 6 percent.
A small cohort – 8 percent – expects the key interest rate to exceed 6 percent.
Once interest rates peak, economists surveyed overwhelmingly thought the Fed would keep them there for quite some time. About 60 percent of respondents expected the first cut to come in the third quarter of next year or later.
That’s nearly double the share of economists who predicted this time frame in June, when they were last surveyed.
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The survey comes just days before Fed officials’ next policy meeting, where they are again expected to hold off on further action.
The rapid policy tightening since March 2022 has been the most aggressive attempt to curb demand in decades.
While inflationary pressures have eased and the labor market is weakening, many economists surveyed fear that the underlying momentum in the world’s largest economy is still too strong and that inflation will be harder to combat.
Gordon Hanson, a professor at Harvard Kennedy School, said: “Just as there were concerns that the Fed was too slow to respond, you don’t want the Fed to move too quickly.”
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Since June, respondents have doubled their forecasts for economic growth through the end of the year, to an average estimate of 2 percent.
The unemployment rate is expected to settle at 4 percent, while the Fed’s preferred inflation indicator – the price index of personal consumption expenditures after removal of food and energy prices – is expected to fall to 3.8 percent. According to the latest data from July, it is 4.2 percent.
By the end of 2024, only a third thought it was “very” or “somewhat” unlikely that core inflation would exceed 3 percent. The vast majority saw either an even probability or a higher probability.
A constraint on oil supplies is the biggest risk to the inflation outlook, they said.
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Christiane Baumeister, a professor at the University of Notre-Dame, is among those worried about energy prices after Saudi Arabia and Russia decided to cut supply. It expects prices to continue rising, potentially raising expectations of future inflation and delaying the decline in core price growth as companies choose to pass higher costs on to consumers.
The sharp downturn in the Chinese economy could offset this; It is expected to slow global growth in the coming months.
Domestic headwinds, including student loan retaliation and the looming threat of a government shutdown, could further weigh on demand.
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Sebnem Kalemli-Özcan, an economist at the University of Maryland and a member of the New York Fed’s economic advisory board, is among the majority of economists surveyed who believe the so-called neutral interest rate – a level that neither stimulates nor suppresses growth – is higher for now than in the past.
That will further delay the speed at which the Fed can cut its key interest rate next year, she said.
“Although we feel it is higher, we don’t know exactly how high R-Star is currently,” she said.
Economists surveyed have become more optimistic about the chances of a soft landing in which the Fed can lower inflation without excessive job losses.
More than 40 percent believe it is “more likely” that inflation can be brought down towards 2 percent without the unemployment rate exceeding 5 percent. Another quarter of respondents said this was “more likely than not.”
When asked about the timing of the next recession, many have revised their estimates further downward than they had previously predicted.
Source : www.ft.com