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

The US Federal Reserve will have to take tougher measures than expected to stamp out inflation, according to a majority of leading academic economists polled by the Financial Times who predict at least another two quarter points of interest rate hikes this year.

The last questionnaire, conducted in conjunction with the Kent A Clark Center for Global Markets at the University of Chicago Booth School of Business, predicts that the Fed will increase its reference rate to at least 5.5 percent this year. The Fed funds futures markets suggest traders favor one more quarter-point rate hike in July.

Top Fed officials have expressed a preference for holding off on a rate hike at their next two-day meeting on Tuesday, while leaving the door ajar for further tightening. After 10 consecutive increases since March 2022, the federal funds rate now hovers between 5 percent and 5.25 percent, the highest level since mid-2007.

Of the 42 economists surveyed between June 5 and June 7, 67 percent predict the federal funds rate will rise between 5.5 percent and 6 percent this year. That’s up from 49 percent in the previous survey, which was conducted just days after a string of bank failures in March.

More than half of respondents said the peak will be reached in or before the third quarter, 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 bulk expecting the first in Q2 or later.

“They haven’t done nearly enough to bring inflation down,” said Dean Croushore, an economist at the Fed’s Philadelphia Reserve Bank for 14 years. “They are on the right track, but the path will be longer and more winding than they ever imagined.”

Despite growing expectations that the Fed is not yet done with its tightening campaign, most economists thought the Fed would miss a step in June. In addition, nearly 70 percent said this would be the right choice, as it was not yet clear whether policy rates are high enough to drive inflation down and that officials could also resume increases if necessary.

“The economy turned out to be much more resilient than we originally thought and the question is, is that resilience temporary and are the hikes in the pipeline sufficient or should the Fed hike further? The Fed is pausing to see if it can better see which of those two is correct,” said Jonathan Parker of the Massachusetts Institute of Technology’s Sloan School of Management. Still, he believes the Fed will make at least two more quarter-point rate hikes.

An added complication is the pullback by regional lenders following the collapse of Silicon Valley Bank, First Republic and a handful of other institutions. Arvind Krishnamurthy of the Stanford Graduate School of Business said the economic effects are highly uncertain, but a credit crunch is clearly underway, suggesting the Fed may not need to do much in terms of further rate hikes to get the same inflation result .

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However, among respondents, concerns about inflation seemed to outweigh concerns in the banking sector. Compared with March, the median estimate of the price index for personal consumption expenditures once costs for food and energy — the Fed’s preferred inflation measure — are 0.2 percentage points higher to 4 percent by the end of the year. As of April, it recorded an annualized growth rate of 4.7 percent, well above the Fed’s 2 percent target.

By the end of 2024, about 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 “about as likely as not.”

“There has been very little progress on core inflation, the real economy is performing much better than anyone could have ever expected, and policymakers have yet to fully adapt to that reality,” said Jason Furman, who previously served as economic adviser to the Obama administration. administration. He thinks the central bank should raise the Fed Funds rate to at least 6 percent, a view of 12 percent of those surveyed.

The biggest factors lowering inflation rates are rising unemployment and declining wage growth, 48 percent of economists said, followed by global headwinds from a weakening Chinese economy and a strong US dollar. However, most economists do not expect an imminent material increase in the unemployment rate. The median estimate for the end of the year is 4.1 percent, slightly higher than the current level of 3.7 percent.

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Recession calls have also been pushed back. Most economists don’t see the National Bureau of Economic Research issuing a statement until 2024, compared to last year’s surveys in which about 80 percent expected a recession in 2023.

About 70 percent said unemployment peaks in a coming recession will not be reached until the third quarter of 2024 or later. Gabriel Chodorow-Reich of Harvard University said he is bracing for a mild recession in which unemployment will reach around 6 percent.