Economists predict at least two more rate hikes to quell stubborn inflation

The US Federal Reserve will have to take tougher measures than expected to root out inflation, according to most of the leading academic economists polled by the Financial Times, who predict at least two more quarter-point interest rate hikes this year.

Last surveyconducted in partnership with the Kent Clark Center for Global Markets at the School of Business. Booth of the University of Chicago, predicts the Fed will raise its base rate to at least 5.5% this year. fed stock futures markets suggest that traders are in favor of another quarter-point rate hike in July.

Senior Fed officials said that at their next two-day meeting on Tuesday they would prefer not to raise the rate, leaving room for further tightening. After 10 consecutive increases since March 2022, the federal funds rate is now hovering between 5 and 5.25 percent, the highest level since mid-2007.

Of 42 economists polled between June 5 and 7, 67 percent predict the federal funds rate will peak between 5.5 and 6 percent this year. This is more than 49 percent previous pollwhich came just days after a string of bank failures in March.

More than half of respondents said the peak will be reached in the third quarter or earlier, while just over a third expect it to be reached in the last three months of the year. No cuts are expected until 2024, with the bulk forecasting the first in the second quarter or later.

“They haven’t done long enough yet to get inflation down,” said Dean Crowshor, who worked as an economist at the Philadelphia Fed Reserve Bank for 14 years. “They are on the right track, but the path will be longer and more tortuous than they ever thought.”

Despite rising expectations that the Fed was not yet done with its tightening campaign, most economists thought the Fed would miss the June move. What’s more, almost 70 percent said it would be the right thing to do, because it’s not yet clear whether the policy rate is high enough to bring down inflation and that officials can also resume raising it if necessary.

“The economy has turned out to be much more resilient than we originally thought, and the question is, is this resilience temporary and are the planned increases enough, or does the Fed need to raise more? The Fed is pausing to see if it can better understand which of these two truths is true,” said Jonathan Parker of the MIT Sloan School of Management. However, he believes the Fed will raise rates at least two more times by a quarter point.

An additional complication is the retreat of regional lenders after the collapse of Silicon Valley Bank, First Republic and several other institutions. Arvind Krishnamurthy of the Stanford Graduate School of Business said the economic impact is highly uncertain, but it is clear that the credit crunch is already underway, suggesting the Fed may not need to do so much in terms of further rate hikes to get the same inflation outcome.

However, among respondents, concerns about inflation seem to outweigh those of the banking sector. Compared to March, the median estimate of the personal consumption price index after excluding food and energy costs, the Fed’s preferred indicator of inflation, rose 0.2 percentage points to 4 percent by the end of the year. As of April, it has registered a 4.7 percent annual pace, well above the Fed’s 2 percent target.

By the end of 2024, roughly a third of respondents said it was “somewhat” or “very” likely that core PCE would exceed 3 percent. More than 40 percent said it was “probably, maybe not.”

“There has been little to no progress on core inflation, the real economy is performing much better than anyone could have expected, and policymakers have yet to fully adjust to that reality,” said Jason Furman, who previously served as an economic adviser to Obama. administration He believes the central bank will need to raise the federal funds rate to at least 6 percent, a view shared by 12 percent of those polled.

According to 48% of economists, the main factors lowering the inflation rate will be rising unemployment and lower wage growth, followed by global headwinds associated with a weakening Chinese economy and a strong US dollar. However, most economists do not expect an inevitable significant jump in the unemployment rate. The year-end median estimate is 4.1 percent, slightly up from the current level of 3.7 percent.

Calls for a recession have also been dropped. Most economists don’t see the National Bureau of Economic Research declaring a recession until 2024, compared to last year’s polls, in which roughly 80 percent expected a recession in 2023.

About 70 percent said that the peak unemployment rate in the upcoming recession will not be reached until the third quarter of 2024 or later. Gabriel Chodorov-Reich of Harvard University said he was preparing for a mild recession, with unemployment rising to around 6 percent.