Fed to wait until 2023 to raise rates, but there is risk of earlier hike

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While half of Fed members last month forecast a hike in their benchmark overnight lending rate next year, most economists surveyed were cautious.

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The Federal Reserve will wait until 2023 before raising interest rates, according to most economists in a Reuters poll, who nonetheless said the greater risk to the US economy in the coming year was persistent high inflation.

While half of the US central bank’s policy-making committee members estimated last month that the Fed would raise its benchmark overnight lending rate — the federal funds rate — next year, most economists surveyed were more cautious.

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Voting was held on 12-18 October.

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“We expect the Fed to be patient. We anticipate no liftoff for the funds rate until the end of 2023, but the exact timing will depend critically on how the outlook is as more data is reported. evolves,” said Jim O’Sullivan, Head of US Macro Strategist at TD Securities.

40 out of 67 economists said the fed funds rate would rise from its current level of 0-0.25% in 2023 or later, with most clustering around the first quarter of that year. The remaining 27 economists expect a rate hike by the end of next year.

Consumer demand in a reopening economy is adding to price pressures at a time when global supply chains, disrupted by the coronavirus pandemic, are causing widespread inventory shortages.

High inflation is a concern for many central banks, some of which have already raised rates or are close to doing so. The Fed, for its part, is expected to announce next month that it will begin reducing the $120 billion in monthly bond purchases it is making to stem the economic fallout of the pandemic.

Thirty-nine of the 37 economists who responded said the risk to the timing of the Fed’s first interest rate hike was that it could come earlier than they expected.

Chief international economist James Knightley said, “Unfortunately, we suspect that supply-chain issues and labor market constraints will be resolved quickly, so inflation will remain high until 2022. Given this situation, we look forward to September next year and beyond.” We expect interest rates to rise in December.” in ing.

Of the 40 economists who answered an additional question, 22 said that the major concern for the US economy in the coming year was persistently high inflation, and 30% of them said it was a slower than expected in growth.

The consensus for the Personal Consumption Expenditure (PCE) price index excluding food and energy, one of the Fed’s key inflation gauges, points to targeting inflation by the end of next year, albeit at a slower pace in the second half of 2022. economic development from

“We are raising key inflation projections slightly, reflecting the ongoing supply/demand imbalance,” said O’Sullivan of TD Securities.

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“Yes, inflation projections for 2021 keep rising, but Fed policy needs to be appropriately positioned for where the economy is going, not where it has been.”

After expanding 6.7% in the second quarter on an annualized basis, US economic growth was expected to slow to 3.8% in the third quarter, before expanding to 5.0% in the current quarter. That compares with an estimated 4.4% and 5.1% for the third and fourth quarters, respectively, in September.

On average, the economy was expected to grow by 4.0% next year, 2.5% in 2023 and 2.2% in 2024. This is compared to the previous forecast of 4.2% for 2022 and 2.3% for 2023. The September survey did not ask for a forecast for 2024. .

The dilemma for Fed policymakers, who are tasked with targeting stable inflation as well as maximum employment, is whether raising early rates to prevent inflation from rising too quickly could potentially sever further job gains. .

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The unemployment rate was expected to hover between 3.6% and 4.7% until at least the second half of 2023, with only a handful of economists predicting where it was before the pandemic.


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