BENGALURU, July 19 (Reuters) – The U.S. Federal Reserve will raise its benchmark overnight rate by 25 basis points on July 26 to 5.25-, according to a Reuters poll of all 106 economists. It is planned to be in the range of 5.50%, but the majority still said so. It will be the last increase in the current tightening cycle.
More than a year after the Fed launched its most aggressive rate-hiking campaign in history, a resilient economy and historically low unemployment have repeatedly baffled analysts and investors.
Inflation has eased, with the headline consumer price index (CPI) reading slowing to 3.0% in June from 4.0% in May. Many Wall Street observers have since concluded that inflation could soon be contained, renewing their view that a rate cut could come as early as the end of 2023. There are also
The current debate is whether further rate hikes are necessary to ensure that “disinflation” continues, or whether further hikes could cause unnecessary damage to the economy.
But underlying inflation remains subdued, with Fed Chairman Powell and other central bank officials saying further tightening is coming, despite the decision to pause interest rate hikes at a policy meeting last month. there is
The view that interest rates will remain high for a prolonged period appears to be gaining momentum, with at least one rate cut expected by the end of March next year among respondents surveyed between July 13 and 18. The percentage of people who expected it to have plummeted from 78% to 55%. last month.
“Despite the weakness in the CPI, the Fed still expects a rate hike in July (and) hopes inflation will continue to soften, but expects that to be a policy-making decision,” Jan Nebulj said. It’s not wise from our point of view.” U.S. Rates Strategist at NatWest Markets.
“We are not going to rush to say that the war against inflation has been won, as we have seen in the past with fake necks.”
Economists and financial market traders still seem a little out of step with the Fed.
The latest “dot plot” forecast by members of the Federal Open Market Committee, which makes policy decisions for central banks, suggests the benchmark overnight rate will peak at 5.50-5.75%, while a Reuters survey Only 19 of 106 economists expected it to reach that level. range.
The dollar fell to its lowest in more than a year against major currencies on speculation that the Fed was nearing the end of its rate-hiking cycle. Price pressures may continue to rise as a weaker dollar pushes import prices higher.
In fact, economists still worry that inflation may not come down quickly enough.
Twenty of the 29 respondents to the poll’s follow-up question said core inflation, which excludes food and energy prices, would fall slightly by the end of the year or remain near its current level of just under 5%. .
The Fed’s target for inflation, as measured by the Personal Consumption Expenditure Index (PCE), is 2.0%, but the last reported inflation was 3.8% in May.
But all inflation indicators surveyed by Reuters (CPI, Core CPI, PCE and Core PCE) were expected to reach 2% by 2025 at the earliest.
“The latest numbers are encouraging, but the easy base effect is over now, so the real battle is about to begin,” said Doug Porter, chief economist at BMO Capital Markets, who said inflation was partly responsible for the fall in June. He referred to the fact that inflation had fallen significantly. That’s how high it was at the same time last year.
“As the disinflationary forces of low energy prices wane, we will have to deal with the underlying 4% trend in the core economy … (and) a true breakthrough in the core economy will likely require a more significant slowdown in the economy. will be needed.”
Polls show that the buoyant labor market will loosen only slightly, with the unemployment rate rising to 4.0% by the end of 2023 from the current 3.6%.
A slightly majority of economists responding to additional questions (14 out of 23) said wage inflation would be the most troublesome element of core inflation.
Nearly two-thirds of respondents to another question (27 out of 41) expect a US recession within the next year, with 85% of those expecting a recession at some point in 2023. started.
Still, the economy was expected to grow 1.5% this year, up from a forecast of 1.2% a month ago, and slow to 0.7% next year.
(More stories from Reuters’ global economic survey here:)
Reporting by Indradip Ghosh and Prerana Bhat. Voted by Maneesh Kumar.Editing: Ross Finley and Paul Simao
Our criteria: Thomson Reuters Trust Principles.
