According to a majority of leading academic economists surveyed by the Financial Times, the US central bank will raise its benchmark policy rate above 4 percent and hold it beyond 2023 to stamp out higher inflation.
The latest survey, conducted in partnership with the Initiative on Global Markets at the University of Chicago’s Booth School of Business, shows the Federal Reserve is a long way from ending its campaign to tighten monetary policy. It has already raised interest rates this year at the most aggressive pace since 1981.
Hovering near zero as recently as March, the federal funds rate now sits between 2.25 percent and 2.50 percent. The Federal Open Market Committee regroups on Tuesday for a two-day policy meeting at which officials are expected to implement a 0.75 percentage point increase for the third time in a row. The move will raise the rate to a new target range of 3.25 per cent from 3 per cent.
About 70 percent of 44 economists surveyed between September 13 and 15 believe the fed funds rate will peak between 4 percent and 5 percent in this tight cycle, with 20 percent noting that it You will need to cross that level.
“The FOMC still doesn’t agree with how much they need to raise rates,” said Professor Eric Swanson of the University of California, Irvine. “If the Fed wants to slow the economy now, they need to raise the funds rate above” [core] inflation.”
While the Fed typically targets a rate of 2 percent for the “core” personal consumption expenditure (PCE) price index — which excludes volatile commodities like food and energy — it also closely monitors the consumer price index. . Inflation picked up unexpectedly in August, with the original measurement at 0.6 percent for the month, or 6.3 percent from the previous year.
The Project Core PCE of most respondents will drop to 3.5 percent by the end of 2023 from its recent level of 4.6 percent in July. But about a third still expect it to exceed 3 percent after 12 months. Another 27 percent said it was “not as much as possible” to stay above that threshold at the time – a sign of great unease about high inflation becoming more deeply embedded in the economy.
“I fear we have reached a point where the Fed risks seriously undermining its credibility, and so it needs to be very cognizant of this,” at the University of California, Berkeley. John Steinson said.
“We were all hoping inflation would subside, and we’ve all been disappointed over and over again.” More than a third of polled economists have warned that it will fail to adequately control inflation if the Fed does not raise interest rates above 4 percent by the end of this year.
Beyond raising rates to a level that disrupts economic activity, the bulk of respondents believe the Fed will keep them there for a sustained period.
Lower prices, financial market volatility and a deteriorating labor market are the most likely reasons for the Fed to halt its tightening campaign, but according to 68 percent of people, there is no forecast for the fed funds rate cut until 2024. Of that, a quarter don’t expect the Fed to lower its benchmark policy rate until the second half of 2024 or later.
However, some believe the Fed will increase its efforts by shrinking its balance sheet by about $9tn through outright sales of its agency mortgage-backed securities.
Such aggressive action to cool the economy and root out inflation will cost, as President Jay Powell has demonstrated in recent demonstrations.
About 70 percent of respondents expect the National Bureau of Economic Research – the official arbiter of when the US recession will begin and end – to declare one in 2023, with the bulk holding it in the first or second quarter. That compares with about 50 percent who see Europe heading into recession in the fourth quarter or earlier of this year.
The US recession is likely to last for two or three quarters, with most economists expecting it to last four quarters or more, with more than 20 percent. At its peak, the unemployment rate could settle between 5 percent and 6 percent, according to 57 percent of the respondents, which is higher than its current level of 3.7 percent. A third sees it taking 6 percent.
“It’s going to fall on workers who can least afford it when we see an increase in unemployment, as these rate increases,” warns Julie Smith at Lafayette College. “Even if it’s a small amount — a percentage point or two increase in unemployment — it’s a real pain on real families that aren’t prepared to face these kinds of shocks.”
The easing of war-related supply constraints in Ukraine and the Covid-19 lockdown in China could help reduce Fed demand, which ultimately means a less severe economic contraction,” said Şebnem Kalemli-Özcan at the University of Maryland . But he cautioned that the outlook is highly uncertain.
“Obviously it’s one blow after another, so I don’t believe it’s going to happen immediately,” Kalemali-Ozcan said. “I can’t tell you a time frame, but it’s going in the right direction.”