BENGALURU, Nov 18 (Reuters) – The Federal Reserve will cut interest rates by 50 basis points in December, but economists polled by Reuters say the U.S. central bank’s long-term tightening and high policy rate are the biggest. risks in the current outlook.
US consumer price inflation unexpectedly fell below 8% last month, reinforcing well-established market expectations that the Fed will go for a smaller rate hike going forward after a 75-basis-point increase.
But the latest Reuters poll shows forecasts for inflation next year and next are slightly higher than expected a month ago, suggesting it is not yet time to consider an imminent break in the Fed’s tightening campaign.
The Fed is set to raise the federal funds rate by half a percentage point to a 4.25%-4.50% range at its Dec. policy meeting. 13-14, according to 78 of 84 economists who participated in the Nov. poll. 14-17 Reuters. .
The interest rate, which the Fed raised from near zero in March in one of its campaigns to increase rapidly, was widely expected to reach 4.75%-5.00% at the beginning of next year, 25 basis points higher than seen. in last month’s poll. Peak rate estimates range between 4.25%-4.50% and 5.75%-6.00%.
But 16 of the 28 respondents to the additional question said that the biggest risk is that the rates will rise higher and later than they currently expect, and another four said higher and earlier. Some say it will be lower than before.
“Although the markets are focused on high inflation, low inflation rates have continued. This may force the Fed to continue raising the federal funds rate well into next year and beyond the levels currently expected,” said Philip Marey, US strategist at Rabobank.
Several Fed policymakers have indicated that rates will be higher than their estimates from September and that they would need to see a consistent and meaningful drop in inflation to consider stopping tightening with core CPI running more than three times the 2% target.
While inflation has been seen to gradually decline, inflation as measured by the CPI and the core personal expenditure (PCE) price index is not seen to return to 2% until at least 2025.
Most economists, 18 of 29, also said that the biggest risk is that inflation will be greater than they expected in the next six months.
“Although the softer (CPI) report will support the Fed’s desire to slow the rate increase to 50 points in December, we do not see in the report any clear evidence that inflation will decrease convincingly to the 2% target,” he said. Andrew Hollenhorst, US economist at Citigroup.
“Soft reading doesn’t really affect the increase we’re seeing in inflation.”
The biggest tightening cycle in four decades has come with a 60% chance of a recession in the US within a year, according to the poll, the same as last month’s survey.
While 22 out of 30 economists said the recession could be deep – the economy is expected to grow just 0.4% this year – fears of a deeper recession have caused companies to cut thousands of jobs across the country.
The unemployment rate was expected to rise from 3.7% to 4.6% by the end of next year – with a peak forecast of 5.9% – and an average of 4.8% in 2024, still well below the levels seen in the previous recession. Estimates of the unemployment rate were generally higher than last month’s poll.
“Without a slight increase in unemployment next year, the economy will likely slow down, which will leave the Fed in the unusual position of maintaining restrictive policy during a recession,” said Michael Moran, an economist. Daiwa Capital Markets of America, which had the highest interest rate in the poll.
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Narrated by Prerana Bhat; Additional reporting by Indradip Ghosh; Analysis by Sarupya Ganguly; Poll by Milounee Purohit and Dhruvi Shah; Editing by Ross Finley and Paul Simao
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