Fed to slow hike to 50 basis points in September as recession worries rise, Reuters poll shows

A resident buys food at a local market, in downtown San Francisco, California, U.S., July 13, 2022. REUTERS/Carlos Barria/File Photo

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BENGALURU, Aug 22 (Reuters) – The U.S. Federal Reserve will raise rates by 50 basis points in September as inflation peaks and recession worries grow, economists say in a Reuters poll , who said the risks were skewed towards a higher peak.

Still around a four-decade high, inflation eased last month, pushing fed funds futures to narrowly price up 50 basis points in September after moves 75 basis points in June and July.

Most economists in a Reuters poll from Aug. 16-19 predicted a half-percentage-point hike next month, similar to the last poll, which would take the key interest rate to 2.75%- 3.00%.

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Eighteen of 94 respondents expected the Fed to hit 75 basis points.

Last month, Fed Chairman Jerome Powell, who was scheduled to speak in Jackson Hole next week, said “it will likely become appropriate to slow the pace of increases.” Read more

A cumulative 225 basis points of increases since March and more to come have brought a recession closer and the survey showed a median 45% chance of one in the year ahead, up from 40% in July, and a 50% probability of one in two. years.

“A recession is a necessary evil and the only way to get to where we want to be – where people don’t lose all their money to rising prices,” said Philip Marey, senior US strategist at Rabobank.

“It doesn’t need to be heavy because major recessions usually come at the same time as the financial crisis and, for now, household balance sheets are strong.”

Thirty-seven of 48 economists said that if the United States entered a recession within the next two years, it would be short and superficial. Ten said it would be long and shallow and only one said long and deep.

Consumer price inflation is expected to remain above the Fed’s 2% target through at least 2024 – averaging 8.0% and 3.7% this year and next – pushing potentially the central bank to raise its policy rate higher into restrictive territory.

Nearly 90% of respondents saw the policy rate at 3.25%-3.50% or higher at the end of this year, largely unchanged from the last poll.

Expectations of a slower pace of rate hikes have boosted stock and bond markets over the past week and eased financial conditions somewhat, adding more pressure on the Fed. Read more

While polling medians showed a final fed funds rate — a level they would peak at in the current tightening cycle — of 3.50% to 3.75%, expected in the first quarter of 2023, nearly 80% of economists who responded to an additional question, 29 of 37, said the risks were skewed towards a higher rate than expected.

“Stubborn inflation continues to pose the biggest threat to the economy. Inflation may not come down as expected. In this case, policy rates should be much more restrictive, somewhere in the 4-5% range. “said Sal Guatieri. , Senior Economist at BMO Capital Markets.

“If that’s the case, there won’t be much debate about whether the economy can avoid a deep downturn.”

The world’s largest economy contracted in the first two quarters of the year, roughly the definition of a technical recession.

However, the National Bureau of Economic Research – the official arbiter of the US recession – also looks at other factors to officially declare a recession, including employment and real income.

Nonfarm payrolls remained strong and the jobless rate fell to 3.5% last month, its pre-pandemic low, so the economy is expected to grow an average of 1.7% this year and 1.0% the next. Read more

The unemployment rate was forecast to average 3.6%, 3.9% and 4.0% in 2022, 2023 and 2024, respectively, still very low compared to previous recessions.

(For more stories from the Reuters Global Economic Survey:)

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Reporting by Prerana Bhat and Indradip Ghosh; Poll by Aditi Verma and Indradip Ghosh; Editing by Jonathan Cable and Tomasz Janowski

Our standards: The Thomson Reuters Trust Principles.

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