Most economists narrowly expect the Federal Reserve to hike rates next week and nudge its peak interest rate up slightly in a continuing response to high inflation despite concerns that a banking crisis could have broader economic impact.
(Bloomberg) — Most economists narrowly expect the Federal Reserve to hike rates next week and nudge its peak interest rate up slightly in a continuing response to high inflation despite concerns that a banking crisis could have broader economic impact.
The Federal Open Market Committee will raise rates by a quarter point at its March 21-22 meeting and at its next two gatherings to a 5.25%-5.5% range, according to economists surveyed by Bloomberg News. Chair Jerome Powell had hinted last week at an even more aggressive stance as he said the policy group might raise interest rates higher than previously expected and at a potentially faster pace, meaning by a half point or more.
The FOMC’s median projection in its quarterly “dot plot” is expected to show the policy benchmark at 5.4% at the end of 2023 – a quarter point higher than what economists expect the actual rate to be – compared to 5.1% seen in December. That would deliver a hawkish surprise to investors, who as of Thursday morning saw a peak at 4.9% in May and expected roughly a full percentage point of cuts during the remainder of the year.
About two-thirds of responses came in before the latest eruption of turmoil on Wednesday, when a crisis of confidence arose around Credit Suisse Group AG, a giant lender deeply enmeshed in the global financial system. Most responses did reflect views following the failure of Silicon Valley Bank.
“I am very doubtful that SVB crisis will change monetary policy,” said Hugh Johnson, chairman of Hugh Johnson Economics LLC. “I believe the crisis will be contained (limited) and systemic risk is quite low.”
An overwhelming majority of economists expect a quarter-point hike as opposed to the half point many envisioned earlier this month, with a few looking for a pause in rate increases and one, Nomura Securities, looking for a cut in rates.
What Bloomberg Economics Says…
“It will be a close call between a pause and 25 basis points. As of conditions of today, we are still inclined for 25 basis points. One of the most important channel of financial market distress to the real economy is through credit spreads, and so far, it has not increased to a degree that would imply a significant slowdown in the economy. Larger adverse impact from the current crisis to real economy is a risk — so far — not a foregone outcome or even a likely outcome.”
— Anna Wong, chief US economist
Worries in the aftermath of the failures of SVB and Signature Bank have led markets to a broad repricing of the Fed’s interest-rate path. Traders, who were betting on the possibility of a 50 basis-point hike at the Fed’s March meeting prior to the banking crisis, were narrowly leaning toward a quarter-point hike as of Thursday morning over the alternate outcome of a pause.
“The Fed needs to engage in a hawkish pause to assess financial stability and prevent a larger credit market seizure,” said Diane Swonk, chief economist at KPMG LLP, referring to a pause in which the Fed would signal more hikes to come. “They are in a bit of a policy box as the credit tightening that occurs via regional banks will be significant.”
Among the economists, nearly three-quarters say the turmoil will reduce the likelihood or pace of near-term rate hikes and close to half say it will reduce the peak interest rate. Just one in five see it having no effect on policy.
The survey of economists was conducted March 10-15 and those who responded prior to the SVB failure and Fed’s response were given the opportunity to adjust their views and respond to two questions that were added.
Powell hasn’t commented publicly on monetary policy this week, though prior to the turmoil had argued that interest rates would need to stay higher for longer and that the central bank wouldn’t loosen policy prematurely in a mistake similar to the Fed in the 1970s.
The banking turmoil is likely to affect the economic outlook in the view of economists. Nearly half say that it will reduce economic growth and a quarter see it reducing inflation over the next year.
Even so, the Fed is expected to continue to reduce its balance sheet over the next three years as part of an ongoing program, in the view of economists. Four in 10 see the FOMC eventually moving to sell mortgage-backed securities, with the third quarter of 2023 seen as a possible starting point.
The Fed’s summary of economic projections is likely to show that policy makers are looking for faster US growth and less unemployment than they were expecting in December. They may upgrade 2023 growth estimates to 0.8% compared to 0.5% in December while seeing unemployment rising to 4.2%. The US jobless rate stood at 3.6% last month.
The committee in its forecasts is likely to see inflation as being somewhat more elevated than its December view at 3.3% in 2023 and 2.5% next year. The Fed targets 2% inflation measured by the personal consumption expenditures price index, which rose by 5.4% in January and has been higher and more persistent than forecast for much of the past year.
The forecasts will be made following the latest disappointing news on prices. the consumer price index, excluding food and energy, increased 0.5% last month and 5.5% from a year earlier. The central bank targets 2% inflation based on a separate gauge.
“The Fed should make it even clearer than they have so far that it is inflation, not a soft landing, that matters,” said Joel Naroff, president of Naroff Economics LLC. “Even with the recent financial market problems, the Fed has to do what it has to do, not cover up bank mismanagement by modifying monetary policy.”
While Fed officials see a narrow path for a soft landing, a slight majority of economists see a US recession as likely. Most of the rest see a hard landing with a period of contraction or zero growth that falls just short of a formally declared downturn. Among those predicting a downturn, three quarters expect it to begin in the second or third quarter.
More than half of economists expect a dissent at the meeting, which would be a break from the mostly unified votes by the FOMC.
While Fed policy has drawn criticism from both those who believe the Fed was too slow to address high inflation or that current tight policy will put millions out of work, half the economists say monetary policy is about right at present and the rest are split on whether it is too hawkish or dovish.
More stories like this are available on bloomberg.com
©2023 Bloomberg L.P.