According to a Reuters poll market research, the U.S. Federal Reserve will raise rates by 50 basis points in September amid expectations inflation has peaked and recession worries are growing.
Inflation last month eased to around a four-decade high, forcing Fed funds futures to narrowly shift to a 50 basis point hike in September after 75 basis points in June and July.
In an Aug. 16-19 Reuters poll, most economists predicted the key interest rate would rise half a percentage point next month, to 2.75%-3.00%.
Eighteen of the 94 surveyed expected the Fed to go for 75 basis points.
During a recent speech at Jackson Hole, Fed Chair Jerome Powell said “it is likely that the pace of rate increases will need to slow down.”
In the survey of best market research companies, 45% of respondents said a recession was likely within one year, up from 40% in July, and 50% within two years, due to 225 basis points of hikes since March.
There has been a cumulative 225 basis point increase since March, and as more hikes are expected, a recession is closer than ever. According to the survey, the probability of one over the coming year is now 45%, up from 40% in July.
According to Philip Marey, senior U.S. strategist at Rabobank, a recession is a necessary evil and the only way to prevent people from losing all their money to higher prices.
It doesn’t have to be a heavy recession since most big recessions are accompanied by financial crises, and household balance sheets are doing well right now.
Thirty-seven economists predicted a short and shallow recession if the U.S. enters one in the next two years. One person predicted long and shallow, and ten predicted long and deep.
This year and next, consumer price inflation was expected to average 8.0% and 3.7%, respectively, likely pushing the Fed into the restrictive territory by raising its key policy rate.
A majority of participants expect the key policy rate to reach 3.25%-3.50% or higher by the end of the year, similar to what they predicted last year.
Over the past week, the Fed has faced more pressure from equity and bond markets because of expectations of slower rate hikes.
As reported by poll medians, the terminal Fed funds rate – the level at which the Fed funds rate peaks in the current tightening cycle – is expected to be 3.5%-3.75% in Q1 2023, but 29 out of 37 economists, or almost 80%, said the risks were skewed in favor of a higher rate.
Inflation remains the single biggest threat to the economy. There is a possibility that inflation will not fall as planned. According to Sal Guatieri, senior economist at BMO Capital Markets, policy rates would need to be much more restrictive in this situation.
In such a case, there will be little debate about whether the economy can avoid a severe recession
During the first two quarters of this year, the largest economy in the world contracted, which is broadly defined as a technical recession.
As well as employment and real income, the National Bureau of Economic Research, which determines whether a recession exists in the United States, also takes into account other factors.
As the economy continues to grow, non-farm payrolls have continued to increase, and unemployment has fallen to 3.5%, its pre-pandemic low, so this year’s growth is expected to average 1.7%, followed by 1.0% in 2019.
Comparatively, the unemployment rate should remain low in 2022, 2023, and 2024 at 3.6%, 3.9%, and 4.0%, respectively.
