According to a survey conducted by the Financial Times, the US Federal Reserve will have to undertake harsher measures than initially anticipated to curb inflation.
This view is shared by a significant portion of leading academic economists who forecast a minimum of two additional quarter-point interest rate hikes this year.
The latest poll was executed in collaboration with the Kent A Clark Center for Global Markets at the University of Chicago Booth School of Business. The findings suggest that the Fed will raise its benchmark rate to a minimum of 5.5 per cent within this year. However, futures markets of Fed funds indicate that traders are leaning towards a single quarter-point rate increase in July.
High-ranking officials from the Fed have shown a tendency towards abstaining from a rate rise in their upcoming two-day meeting on Tuesday, but they haven’t completely closed the door to further tightening measures. After ten successive hikes since March 2022, the federal funds rate currently sits between 5 per cent and 5.25 per cent, the highest it’s been since mid-2007.
Between June 5 and June 7, a survey of 42 economists revealed that 67% of them anticipate the federal funds rate will reach its peak, ranging from 5.5% to 6%, within this year. This represents a significant increase from the 49% prediction in the previous survey, conducted shortly after multiple bank failures in March.
The majority of the respondents expect the peak rate to be achieved on or before the third quarter of the year, while a little over a third anticipate it to be reached in the last quarter. It is predicted that no rate cuts will occur until 2024, with most forecasts indicating the first cut in the second quarter or later.
Dean Croushore, a former economist at the Fed’s Philadelphia Reserve Bank for 14 years, commented, “While the right steps are being taken to reduce inflation, they haven’t been sufficient enough or long-lasting. The journey will be more extended and difficult than initially anticipated.”
In spite of growing belief that the Fed has not concluded its tightening campaign, the majority of economists believe that the Fed will forgo an increase in June. Furthermore, nearly 70% agree that this would be the appropriate action because it remains uncertain whether the policy rate is high enough to decrease inflation. They suggest officials could resume hikes if necessary.
Jonathan Parker from the MIT Sloan School of Management said, “The economy proved to be more resilient than originally expected. We’re questioning whether this resilience is temporary and whether the current planned increases are sufficient or if the Fed needs to further raise the rates. The Fed is currently waiting to understand which scenario is correct.” Despite this, he believes the Fed will implement at least two additional quarter-point rate hikes.
The situation is further complicated by the withdrawal of regional lenders after the failure of Silicon Valley Bank, First Republic, and a few other institutions. Arvind Krishnamurthy of the Stanford Graduate School of Business points out that the economic impacts are highly uncertain. However, he clearly sees a credit crunch on the horizon, which could imply the Fed might not need to enforce further rate hikes to achieve the same inflation result.
However, among those surveyed, worries about inflation seem to overshadow concerns about the banking sector. Compared to March, the median estimate of the personal consumption expenditures price index, excluding food and energy costs — which is the Fed’s preferred inflation measure — increased by 0.2 percentage points to 4% by the end of the year. As of April, it recorded a yearly rate of 4.7%, significantly above the Fed’s 2% target.
By 2024’s end, approximately a third of the respondents considered it “somewhat” or “very” probable that the core PCE would surpass 3%. Over 40% thought it was “about as likely as not.”
Jason Furman, a former economic adviser to the Obama administration, stated, “There’s barely been any progress on core inflation, the real economy is performing significantly better than anyone could have anticipated, and policymakers are yet to fully adjust to that reality.” Furman, along with 12% of those surveyed, predicts that the central bank will need to raise the fed funds rate to at least 6%.
Almost half of the economists, 48%, said that the primary factors reducing inflation would be increasing unemployment and decreasing wage growth, followed by global challenges from a weakening Chinese economy and a robust US dollar. However, most economists do not foresee a significant near-term increase in the unemployment rate. The median prediction for the year-end stands at 4.1%, a slight rise from its current 3.7%.
Predictions of a recession have also been postponed. The majority of economists do not foresee the National Bureau of Economic Research announcing a recession until 2024, contrasting with surveys carried out last year, where approximately 80% anticipated a recession in 2023.
Around 70% of the respondents anticipate the unemployment rate will not peak until the third quarter of 2024 or later during the next recession. Gabriel Chodorow-Reich from Harvard University expects a moderate recession, where the unemployment rate may increase to around 6%.
