The U.S. Federal Reserve will hike its key interest rate by 50 basis points in June and July, with rising chances of a similar move in September. These numbers come from a Reuters poll of economists, who see no pause in rate rises until next year.
Faced with inflation running at just below a four-decade high and more tightening in the labour market, the U.S. Federal Reserve is under pressure to quickly take its policy rate to the neutral level that neither stimulates nor restricts - and beyond.
All economists in the Reuters poll predicted a 50 basis point federal funds rate hike to 1.25 per cent -1.50 per cent on Wednesday, after a similar move last month. Another such hike was pencilled in for July by most of the survey contributors.
While more than two-thirds of respondents expected a 25 basis point hike in September, more than one-quarter saw the Federal Reserve hiking again by half a point.
"The bad news for the Fed is that inflation is now so far above target that it has little choice but to tighten aggressively," said Ethan Harris, global economist at Bank of America Securities.
The median of 43 responses to an additional question showed a 50% probability of a 50 basis point hike in September. The median probability for a similar move in November and December was 30 per cent and 25 per cent, respectively.
Nearly 60 per cent respondents to an additional question said the Fed would pause raising rates in either the first or second quarter of next year.
Still, analysts saw the Fed funds rate breaching the estimated 2.4 per cent neutral level by year-end to 2.50-2.75 per cent, slightly below market expectations of 2.75 per cent - 3.00 per cent.
The poll expects it to reach a terminal level of 3.00 per cent - 3.25 per cent or higher by end of the second quarter in 2023, three months earlier than a poll taken just a few weeks ago.
That would be at least 75 basis points above the neutral rate and above the 2.25 per cent - 2.50 per cent peak in the last cycle.
Rate hike expectations knocked the U.S. stock market briefly into bear territory last month and the U.S. 10-year Treasury yield to trade above 3 per cent for the first time in three years. They have also kept alive recession risks.
The survey showed a steady median 40 per cent probability of a U.S. recession over the next two years, with a 25 per cent chance of that happening in the coming year.
Economic growth was forecast at 2.6 per cent and 2.0 per cent for 2022 and 2023, respectively, a minor downgrade from last month's survey.
However, price pressures were predicted to persist as supply chain disruptions continue to push up costs globally. Consumer Price Index (CPI) inflation was forecast to average 7.4 per cent this year and remain above the Fed's per cent target until 2024 at least.
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