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Reuters Poll graphic on risks to fed funds terminal rate


Reuters Poll graphic on U.S. economy and Federal Reserve

By Prerana Bhat

BENGALURU, Nov 18 (Reuters) – The Federal Reserve will
downshift in December to deliver a 50-basis-point interest rate
hike, but economists polled by Reuters say a longer period of
U.S. central bank tightening and a higher policy rate peak are
the greatest risks to the current outlook.

U.S. consumer price inflation unexpectedly fell below 8%
last month, bolstering already well-established market
expectations the Fed would go for smaller rate hikes going
forward after four consecutive 75-basis-point increases.

But the latest Reuters poll shows forecasts for inflation in
the coming year and into next are slightly higher than thought
one month ago, suggesting it is not time yet to consider an
imminent pause in the Fed’s tightening campaign.

The Fed is set to raise its federal funds rate by half a
percentage point to the 4.25%-4.50% range at its Dec. 13-14
policy meeting, according to 78 of 84 economists who
participated in a Nov. 14-17 Reuters poll.

The funds rate, which the Fed has raised from near-zero in
March in one of its fastest rate-hiking campaigns ever, was
widely expected to peak at a minimum of 4.75%-5.00% early next
year, 25 basis points higher than seen in last month’s poll.
Peak rate forecasts ranged between 4.25%-4.50% and 5.75%-6.00%.

But 16 of 28 respondents to an additional question said the
bigger risk was that rates would peak higher and later than they
expect now, with another four saying higher and earlier. The
rest said it would be lower and earlier.

“While markets are focused on peak inflation, underlying
inflation trends are persistent. This could force the Fed to
keep raising the federal funds rate well into next year and
beyond levels currently anticipated,” said Philip Marey, senior
U.S. strategist at Rabobank.

Several Fed policymakers have signaled rates would go higher
than their projections from September and they would have to see
a consistent and meaningful decline in price rises to consider
pausing the tightening with core CPI running more than three
times their 2% target.

While price pressures were seen gradually falling, inflation
as measured by the CPI as well as the core personal consumption
expenditures (PCE) price index was not seen returning to 2%
until at least 2025.

A majority of economists, 18 of 29, also said the bigger
risk was that price rises would be bigger than they expected
over the next six months.

“While the softer (CPI) report will support the Fed’s desire
to slow the pace of the rate hikes to 50 basis points in
December, we do not see in the report any clear evidence
inflation will decelerate convincingly toward the 2% target,”
noted Andrew Hollenhorst, chief U.S. economist at Citigroup.

“The softer reading does not significantly affect the upside
we see to inflation.”

The most aggressive tightening cycle in four decades has
brought with it a 60% chance of a U.S. recession within a year,
according to the poll, roughly similar to last month’s survey.

While 22 of 30 economists said the recession would likely be
shallow – the economy is forecast to grow just 0.4% next year as
a whole – fears of a deeper downturn have prompted companies to
cut thousands of jobs across the country.

The unemployment rate was expected to climb from the current
3.7% to 4.6% by the end of next year – with the highest forecast
at 5.9% – and average 4.8% in 2024, still well below the levels
seen in previous recessions. Jobless rate forecasts were broadly
higher compared with the previous month’s poll.

“Despite a potentially modest increase in unemployment next
year, the economy will most likely be in recession, which will
leave the Fed in the unusual position of maintaining a
restrictive policy stance during a downturn in the economy,”
said Michael Moran, chief economist at Daiwa Capital Markets
America, who had one of the highest interest rate forecasts in
the poll.

(For other stories from the Reuters global economic poll:
Reuters Poll- US economy and Federal Reserve rate outlook

(Reporting by Prerana Bhat; Additional reporting by Indradip
Ghosh; Analysis by Sarupya Ganguly; Polling by Milounee Purohit
and Dhruvi Shah; Editing by Ross Finley and Paul Simao)


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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