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Fed to keep interest rates above 4% beyond 2023, economists predict

According to the majority of leading academic economists polled by the Financial Times, the US central bank will raise its key rate above 4 percent and keep it there beyond 2023 in its bid to eradicate high inflation.

The last questionnaire, conducted in conjunction with the Initiative on Global Markets at the University of Chicago’s Booth School of Business, suggests the Federal Reserve is 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 interest rate, which was still close to zero in March, is now between 2.25 and 2.50 percent. The Federal Open Market Committee will meet again on Tuesday for a two-day policy meeting, at which officials are expected to implement a third consecutive 0.75 percentage point rate hike. That move will increase the rate to a new target range of 3 percent to 3.25 percent.

Nearly 70 percent of 44 economists surveyed between Sept. 13-15 believe the Fed fund rate from this tightening cycle will peak between 4 percent and 5 percent, with 20 percent believing it will need to pass that level.

“The FOMC still hasn’t worked out how high to raise interest rates,” said Eric Swanson, a professor at the University of California, Irvine, who predicts the Fed Funds rate will eventually reach between 5 and 6 percent. . “If the Fed wants to slow the economy now, they need to raise the above interest rate [core] inflation.”

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While the Fed typically targets a 2 percent rate on the “core” personal consumption expenditure (PCE) price index — which excludes volatile items like food and energy — it also closely monitors the consumer price index. Inflation unexpectedly accelerated in August, with the core measure rising 0.6 percent for the month, or 6.3 percent year-on-year.

Most respondents expect core PCE to fall from its most recent level of 4.6 percent in July to 3.5 percent by the end of 2023. But nearly a third expect it to still be above 3 percent 12 months later. Another 27 percent said “it was about as likely as it was not” to stay above that threshold at the time — signaling deep concern about high inflation becoming more deeply entrenched in the economy.

“I fear we have reached a point where the Fed is at risk of seriously eroding its credibility, so it needs to be aware of that,” said Jón Steinsson of the University of California, Berkeley.

“We’ve all hoped that inflation would come down, and we’ve all been disappointed time and time again.” More than a third of economists surveyed warn that the Fed will fail to adequately contain inflation if interest rates do not rise above 4 percent before the end of this year.

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In addition to raising interest rates to levels that limit economic activity, most of the respondents believe the Fed will keep them there for an extended period of time.

Easing price pressures, financial market instability and a deteriorating labor market are the most likely reasons for the Fed to suspend its tightening campaign, but 68 percent of respondents say a cut in Fed Funds will not be expected until 2024 at the earliest. interest expected. A quarter of those do not expect the Fed to cut its key rate in the second half of 2024 or later.

Few believe, however, that the Fed will step up its efforts by shrinking its nearly $9 trillion balance sheet through the outright sale of its mortgage-backed securities holdings from its agency.

Such aggressive action to cool the economy and eradicate inflation would come at a cost, a point that chairman Jay Powell made recently.

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Nearly 70 percent of respondents expect the National Bureau of Economic Research — the official arbiter of when U.S. recessions begin and end — to issue a statement in 2023, with the majority believing it will happen in the first or second quarter. . That compares to the roughly 50 percent that Europe will see slipping into recession in the fourth quarter of this year or earlier.

A recession in the US is likely to extend over two or three quarters, most economists think, with more than 20 percent expecting it to last four quarters or longer. At its peak, the unemployment rate could be between 5 and 6 percent, according to 57 percent of respondents, well above its current level of 3.7 percent. A third see it overshadowing 6 percent.

“This will be borne by the workers who can least afford it if unemployment rises at some point as a result of these rate hikes,” cautioned Julie Smith of Lafayette College. “Even if it’s small amounts — a percentage point or two increase in unemployment — that’s a real pain for real households that aren’t prepared to endure these kinds of shocks.”

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Easing supply-related restrictions related to the war in Ukraine and Covid-19 lockdowns in China could help minimize how much the Fed needs to dampen demand, ultimately meaning a less severe economic contraction,” ebnem Kalemli said. -Özcan at the University of Maryland. But she warned that the outlook is very uncertain.

“Obviously this is one shock after another, so I’m not confident this will happen right away,” Kalemli-Özcan said. “I can’t give you a timetable, but it’s going in the right direction.”

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