The U.S. Federal Reserve will raise its benchmark federal funds interest rate by a half-point in September as its concerns grow that the economy is heading toward recession, according to a Reuters poll of 94 economists this month.
A half-point bump would place the fed funds rate between 2.75 and 3 percent.
Only 18 of the economists foresee another three-quarter-point boost next month, which would replicate the Fed’s last two increases.
Despite scattered claims that inflation has peaked, having fallen from 9.1 percent in June to 8.5 percent in July, inflation is more likely to rise again than to fall further, a majority of respondents said.
The Fed’s addition of 2.25 percentage points to its key interest rate has upped the likelihood of a U.S. recession from 40 percent, which the survey recorded in June, to 45 percent now, with a 50-percent probability of one before 2025, the economists believe.
“A recession is a necessary evil and the only way to get to where we want to be, where people don’t lose all their money to higher prices,” Philip Marey, Rabobank’s senior U.S. strategist, said to Reuters.
“It doesn’t have to be a heavy one because usually big recessions occur in conjunction with a financial crisis and, at the moment, household balance sheets are strong,” he noted.
Among 48 economists who responded to the question, 37 said a U.S. recession within the next two years would be “short and shallow,” while 10 see it as long and shallow. Only one economist said a recession would be long and deep.
Consumer price inflation will average 8 percent this year and 3.7 percent in 2023, possibly spurring the Fed to raise rates to recession-causing levels to drive inflation down to the bank’s 2-percent target rate, an average of responses showed.
About 90 percent of the economists expect the fed funds rate to reach 3.25 to 3.50 percent, if not higher, by the end of this year. The response was essentially unchanged from the previous poll.
Of 37 respondents who answered the questions, 29 said the risk that interest rates will be higher than they expect is greater than the rate will be lower.
“Stubborn inflation continues to pose the single biggest threat to the economy,” senior economist Sal Guatieri at BMO Capital Markets told Reuters.
“Inflation may not fall according to plan,” he added. “In this event, policy rates would need to be much more restrictive, somewhere in the 4- to 5-percent range.”
If that happens, “there won’t be much debate about whether the economy can avoid a deep downturn,” he warned.
The U.S. economy will grow 1.7 percent this year and 1 percent the next, according to the poll’s average responses.
Unemployment will average 3.6 this year, 3.9 percent in 2023, and 4 percent in 2024, underscoring the expectation of only a short, shallow recession.
TREND FORECAST: As go the equity markets so too will go interest rates. If the equity markets sharply decline before the Fed meets in September, they will slow down their already slow interest rate hikes. Remember, inflation was spiking for a year-and-a-half while the Fed Head Jerome Powell, and the U.S. Treasury Secretary Janet Yellen kept yelling that inflation was only temporary and then transitory… while we said it was real and rising.
Therefore, they will play the game that suits The Street, and not the general economy since The Street is the Fed and the Fed is The Street… or as George Carlin said, “It’s one big club, and you ain’t in it.”
On the other hand, if equities stay solid, they will boost rates 75 basis points. And again, as we forecast, regardless of the interest rate direction they take in 2023, they will lower rates in early 2024 to boost the economy in anticipation of the U.S. presidential race for the White House.