The Fed will raise interest rates by 75 basis points in July, 50 bps in September

The Fed will raise interest rates by 75 basis points in July, 50 bps in September

By Prerana Bhat and Indradip Ghosh

VENGALOUROU (Reuters) – The Federal Reserve will raise interest rates by another 75 basis points in July, following a rise of half a percentage point in September and will not fall by a quarter of a percentage point until November. at the earliest, according to economists polled by Reuters.

Last week, the Fed raised interest rates by three-quarters of a percentage point, the largest increase since 1994, after official data showed just days earlier that inflation had risen unexpectedly despite expectations it had peaked.

The latest poll, released Wednesday before Fed Chairman Jerome Powell appeared before the Senate Banking Committee as part of his two-year monetary statement to Congress, shows that momentum remains behind the US Federal Reserve. to do more, not less. despite growing concerns about the recession and the sharp sell-off in the financial markets. Bond yields are rising sharply and Wall Street major stock indices are already trading in a bear market, which is set at 20% lower than their peak.

In a June 17-21 Reuters poll, nearly three-quarters of economists, 67 out of 91, expected a 75-point rise in US interest rates in July. This will lead the Fed Funds rate to a range of 2.25% -2.50%, around the neutral level where the Fed estimates that the economy is not stimulated or constrained.

A strong majority expects the central bank to raise its policy rate by another 50 basis points in September, while opinions are more divided on whether to raise it by 25 or 50 basis points in November. The majority expects the Fed to raise interest rates by 25 basis points at its December meeting.

This will lead the Fed Funds rate to a range of 3.25% -3.50% by the end of this year, 75 basis points higher than expected in a poll published just two weeks ago.

Powell last week signaled that a break in the current tightening cycle would only be possible after a significant drop in inflation, which at the moment seems to be a more distant prospect than we thought just a few weeks ago.

“As the Fed continues to underestimate the problem of inflation … not acknowledging that a wage-price cycle has already begun, we expect interest rates to rise faster than they now expect,” wrote Philip Marey, senior US general at Rabobank. in a note.

“Unfortunately, the hiking trail is also likely to be followed by a recession.”

Graphic: Reuters poll – Prospects for US economy and federal funds – .PNG

Inflation will remain above the Fed’s 2% target until at least 2025, according to its own forecasts and a separate Reuters poll. [ECILT/US]

Although the Fed was expected to move downwards in 25 basis points in November, a significant minority, about 40%, expected an increase of 50 basis points in that month’s meeting. Only a few said the Fed would stop raising interest rates sometime this year.

About three-quarters of those polled, 68 out of 91, saw the year-end interest rate at 3.25% -3.50% or higher, in line with the Fed’s “dot plot” which shows those in charge policy making.

Aggressive interest rate hikes are accompanied by their own risks, as reflected in the Fed’s economic forecasts where US unemployment forecasts rose sharply and economic growth was projected to be below average on average.

The poll predicted only a 25 basis point increase in the first quarter of next year, pushing the federal funds rate to 3.50% -3.75%, the probable termination rate.

The Fed was expected to halt the second and third quarters of 2023 and cut interest rates by 25 basis points in the last quarter of next year, according to the median forecast from a smaller sample. However, forecasts for the Fed Funds’ interest rate by the end of 2023 ranged between 2.50% -2.75% and 4.25% -4.50%, underscoring the high uncertainty.

Although Powell said the Fed was not trying to cause a recession, some major traders have either started forecasting one as early as this year or have pushed for a recession.

(Report by Prerana Bhat and Indradip Ghosh, Poll by Swathi Nair and Susobhan Sarkar, Edited by Paul Simao)

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