Hike rates

US Fed to hike rates 75 basis points in July, 50 in September: economists

BENGALURU (REUTERS) – The U.S. Federal Reserve will hike interest rates another 75 basis points in July, followed by a half-percentage-point hike in September, and won’t return to moves by a quarter of a percentage point before November at the earliest, according to economists polled by Reuters.

The Fed last week hiked the federal funds rate by three-quarters of a percentage point, its biggest increase since 1994, after official data days earlier showed inflation unexpectedly rose despite expectation of a peak.

The latest poll results, released Wednesday, June 22 before Fed Chairman Jerome Powell appears before the Senate Banking Committee as part of his semi-annual monetary policy testimony before Congress, show that momentum is building. still trailing the US central bank in doing more, not less, despite growing recession fears and a strong sell-off in financial markets.

Bond yields are up sharply and Wall Street’s major equity indices are already trading in a bear market, defined as 20% below their peak.

In the June 17-21 Reuters poll, nearly three-quarters of economists, 67 out of 91, expected a further 75 basis point U.S. rate hike in July. This would bring the fed funds rate into a range of 2.25% to 2.50%, roughly the neutral level where the Fed believes the economy is neither stimulated nor constrained.

A strong majority expects the central bank to raise its key rate by another 50 basis points in September, with opinions more divided on whether it will increase by 25 or 50 basis points in November. A majority expects the Fed to raise rates by 25 basis points at its December meeting.

That would take the federal funds rate to a range of 3.25% to 3.5% by the end of this year, 75 basis points higher than predicted in a poll released just two weeks ago.

Mr Powell signaled last week that a pause in the current tightening cycle would only be possible after a significant decline in inflation, which currently appears to be a more distant prospect than previously thought. just a few weeks.

“Since the Fed is still underestimating the inflation problem… not recognizing that a price-wage spiral has already begun, we expect it to have to raise rates faster than it is is currently planning,” Rabobank’s senior U.S. strategist Philip Marey wrote in a note. .

“Unfortunately, the hiking trail is also at risk of being followed by a recession.”

Inflation will remain above the Fed’s 2% target until at least 2025, according to its own projections and a separate Reuters poll.

Aggressive rate hikes carry their own risks, as evidenced by the Fed’s economic projections, where forecasts for the US unemployment rate have been raised significantly and economic growth is expected to average below trend.

The poll predicted a single 25 basis point hike in the first quarter of next year, pushing the federal funds rate from 3.5% to 3.75%, the possible terminal rate.

The Fed was expected to pause in the second and third quarters of next year and cut rates by 25 basis points in the last quarter of next year, according to the median forecast from a smaller sample. But forecasts for the federal funds rate by the end of next year ranged between 2.50% and 2.75% and 4.25% and 4.50%, underscoring high uncertainty.

Although Mr. Powell said the Fed was not trying to cause a recession, a few major traders either started predicting one as early as this year or advanced their calls for a recession.