According to a Reuters survey, most analysts expect the US Federal Reserve (Fed/FED) to wait until 2023 to raise interest rates, but they say the greater risk to the US economy is the continued high inflation in the coming year .
Profile picture: May 2020, Washington, USA, Federal Reserve Headquarters. REUTERS/Kevin Lamarque
Although half of the members of the Federal Reserve’s Monetary Policy Committee predicted last month that the Federal Reserve will raise its benchmark interest rate next year, the federal funds rate, most analysts are more cautious.
The survey was conducted from October 12th to 18th.
“We continue to expect the Fed to remain patient. We continue to predict that the federal funds rate will not be raised before the end of 2023, but as more data comes out, the exact timing will largely depend on how the outlook evolves.” TD Securities (TD) Said Jim O’Sullivan, chief macro strategist of the United States at Securities.
Forty of 67 analysts predict that the federal funds rate will rise from the current level of 0-0.25% in 2023 or later, most of which will be concentrated in the first quarter of 2023. The remaining 27 analysts expect to raise interest rates before the end of next year.
At a time when the global supply chain is disrupted by the new crown epidemic, causing widespread inventory shortages, pent-up consumer demand in the reopening economy is intensifying price pressures.
High inflation is a hidden concern for many central banks, some of which have raised interest rates or are close to raising interest rates to deal with it. The Fed is expected to announce next month that it will begin to reduce its monthly bond purchases by $120 billion.
Twenty-nine of the 37 analysts who responded said that the risk of the Fed’s first rate hike is that it may come earlier than they expected.
“Unfortunately, we suspect that supply chain issues and labor market shortages will be resolved soon, so the inflation rate will remain high throughout 2022. Given this situation, we expect to raise interest rates in September and December next year. “James Knightley, chief international analyst at ING, said.
22 of the 40 analysts who answered another question said that the more worrying issue for the U.S. economy in the coming year is the continued increase in inflation, and 30% of the analysts believe that they are more worried about the extent of the slowdown in growth. Greater than expected.
The Personal Consumption Expenditure (PCE) price index excluding food and energy is one of the important indicators of the Fed to measure inflation. The survey shows that the inflation indicator is expected to be higher than the target by the end of next year, but it will slow down along with economic growth in the second half of 2022.
“We slightly raised our core inflation estimates, reflecting the continued imbalance between supply and demand,” said O’Sullivan of TD Securities.
“Yes, inflation expectations in 2021 will continue to rise, but the Fed needs to adjust its policy appropriately based on the future direction of the economy rather than the current situation.”
The US economy grew at an annual rate of 6.7% in the second quarter. The growth rate in the third quarter is expected to slow to 3.8%, and this quarter is expected to grow by 5.0%. In contrast, the third and fourth quarter growth rates predicted in the September survey were 4.4% and 5.1%, respectively.
The average growth rate for next year is expected to be 4.0%, 2.5% in 2023, and 2.2% in 2024. The previous forecast was 4.2% growth in 2022 and 2.3% growth in 2023. The September survey did not request a forecast for 2024.
The dilemma faced by Fed policymakers is whether raising interest rates prematurely in order to prevent the inflation spiral is likely to sacrifice further employment growth. The task of Fed policymakers is to achieve inflation stability and full employment.
It is expected that the unemployment rate will hover between 3.6% and 4.7% before the second half of 2023. Only a few analysts predict that the unemployment rate will fall back to the level before the epidemic.