The US central bank will raise its benchmark policy rate above 4 per cent and hold it there beyond 2023 in its attempt to stem high inflation, according to the majority of leading academic economists polled by the Financial Times.
The latest survey, conducted in partnership with the Global Markets Initiative at the University of Chicago’s Booth School of Business, indicates that the Federal Reserve is still far from ending its campaign to tighten monetary policy. It has already raised interest rates this year at the most aggressive pace since 1981.
The federal funds rate hovered near zero until last March, and is now between 2.25 percent and 2.50 percent. The Federal Open Market Committee meets again on Tuesday for a two-day policy meeting, where officials are expected to implement a 0.75 percentage point increase in a row. The move would raise the rate to a new target range of 3 percent to 3.25 percent.
Nearly 70 percent of the 44 economists surveyed between September 13 and 15 believe the federal funds rate for this tightening cycle will peak between 4 percent and 5 percent, with 20 percent of the opinion that it will need to get through this. the level.
“The FOMC has not yet figured out how much it needs to raise rates,” said Eric Swanson, a professor at the University of California, Irvine, who expects the federal funds rate to eventually reach between 5 and 6 percent. “If the Fed wants to slow the economy now, it has to raise the money rate higher [core] inflation.”
While the Fed typically targets a 2 per cent rate for its “core” PCE – which excludes volatile items such as food and energy – it also closely monitors the CPI. Inflation unexpectedly accelerated in August, with the core index rising 0.6 percent for the month, or 6.3 percent from a year earlier.
Most survey respondents expect core personal consumption expenditures to fall from its last July level of 4.6 percent to 3.5 percent by the end of 2023. But nearly a third expect it to still exceed 3 percent after 12 months. Another 27 percent said it “might have not” remained above that at the time – indicating significant concern about rising inflation becoming more pervasive in the economy.
“I’m afraid we have reached a point where the Federal Reserve is in serious danger of eroding its credibility, and so it needs to start to fully realize that,” said John Steinson of the University of California, Berkeley.
“We were all hoping inflation would start to come down, and we’ve all been disappointed over and over again.” More than a third of economists surveyed warn that the Fed will fail to adequately control inflation if it does not raise interest rates above 4 percent by the end of this year.
Besides raising rates to a level that restricts economic activity, most respondents believe the Fed will keep them there for a sustained period.
Easing price pressures, financial market instability and a deteriorating labor market are more likely reasons for the Federal Reserve to halt its tightening campaign, but a cut in the federal funds rate is not expected until 2024 at the earliest, according to 68 percent of those surveyed. Of that, a quarter doesn’t expect the Fed to cut its benchmark policy rate until the second half of 2024 or beyond.
Few believe, however, that the Fed will step up its efforts by shrinking its roughly $9 trillion balance sheet through direct sales of its agency’s holdings of mortgage-backed securities.
Such an aggressive measure to cool the economy and root out inflation will have costs, which Jay Powell, the president, has made clear in recent appearances.
Nearly 70 percent of respondents expect the National Bureau of Economic Research — the official arbiter on when recessions begin and end in the United States — to announce one in 2023, with a majority opinion that it will happen in the first or second quarter. This compares to nearly 50 per cent of those who see Europe turning into a recession by the last quarter of this year or earlier.
The recession in the US is likely to extend over two or three quarters, most economists believe, with more than 20 percent expecting it to last four or more quarters. At its peak, the unemployment rate could stabilize between 5 percent and 6 percent, according to 57 percent of respondents, well above its current level of 3.7 percent. A third sees it outperforming 6%.
Julie Smith of Lafayette College warned that “this will fall to workers who can’t afford it at least when we have high unemployment due to these price increases at some point.” “Even if the amounts are small – a percentage point or two of the increase in unemployment – this is real pain for real families who are not prepared to weather these kinds of shocks.”
said Şebnem Kalemli Ozkan at the University of Maryland. But she cautioned that the outlook is highly uncertain.
“Obviously this is one shock after another, so I’m not sure this will happen right away,” Kalimli Özcan said. “I can’t tell you a time frame, but it’s headed in the right direction.”