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Fed will make two 25 basis point hikes in Q1, followed by long pause: Reuters poll

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By Prerana Bhat

BENGALURU (Reuters) – The U.S. Federal Reserve will end its tightening cycle after rising by 25 basis points at each of its next two policy meetings and is likely to keep interest rates steady for at least the rest of the year. year, according to a majority of economists in a Reuters poll.

Fed officials broadly agree that the US central bank should ease the pace of tightening to gauge the impact of rate hikes. The Fed raised its benchmark interest rate by 425 basis points last year, with most of the tightening taking place at 75 and 50 basis points.

With inflation continuing to fall, more than 80% of analysts in the latest Reuters poll, 68 of 83, predicted the Fed would ease to a 25 basis point high at its Jan. 31-Feb. 1 meeting. If realized, this would push the prime rate – the federal funds rate – into the range of 4.50% to 4.75%.

The remaining 15 forecast a 50 basis point increase over two weeks, but only one of them was from a US primary trading bank that trades directly with the Fed.

The federal funds rate was expected to peak at between 4.75% and 5.00% in March, according to 61 of 90 economists. This matched interest rate futures prices, but was 25 basis points below the midpoint for 2023 in the “dot chart” projections issued by Fed policymakers at the end of the Dec. 13-14 meeting.

“US inflation shows that price pressures are easing, but in a strong job market environment, the Federal Reserve will be cautious about calling the top on interest rates,” noted James Knightley, chief international economist at ING.

The expected terminal rate would be more than double the peak of the last tightening cycle and the highest since mid-2007, just before the global financial crisis. There was no clear consensus on where the Fed’s benchmark rate would be at the end of 2023, but about two-thirds of respondents had a forecast of 4.75% to 5.00% or higher.

The survey’s interest rate view lagged slightly behind the Fed’s recent projections, but the survey medians for growth, inflation and unemployment were broadly in line.

Inflation was forecast to decline further but remain above the Fed’s 2% target for the next few years, leaving relatively little chance of rate cuts any time soon.

In response to an additional question, more than 60% of respondents, 55 out of 89, said the Fed is more likely to keep rates steady for at least the rest of the year than cut. This view aligns with the survey’s median projection for the first cut in early 2024.

However, a significant minority, 34, said rate cuts this year were more likely than not, with 16 citing a drop in inflation as the main reason. Twelve said a deeper economic downturn and four said a sharp rise in unemployment.

“The Fed has prioritized inflation over employment, so only a sharp decline in core inflation can convince the FOMC (Federal Open Market Committee) to cut rates this year,” said Philip Marey, senior U.S. strategist at Rabobank. .

“While the peak of inflation is behind us, the underlying trend remains persistent… we don’t think inflation will come close to 2% before the end of the year.”

GRAPHIC: Reuters Poll- US Federal Reserve Perspective (https://fingfx.thomsonreuters.com/gfx/polling/jnpwywrxgpw/Reuters%20Poll-%20U.S.%20Federal%20Reserve%20%20outlook.PNG)

Meanwhile, the Fed is more likely to help push the economy into a recession than not. The survey showed a near 60% probability of a US recession within two years.

While it was down from the previous poll, several contributors had not assigned recession probabilities to their forecasts, as a downturn was now their base case, albeit a short and shallow one, as predicted in several past Reuters polls.

The world’s biggest economy was expected to grow by just 0.5% this year, before rebounding to 1.3% growth in 2024, still below its long-term average of around 2%.

With mass layoffs underway, especially at financial and technology companies, the unemployment rate is expected to rise to 4.3% on average over the next year from the current 3.5%, and then rise again to 4.8% next year. year.

While still historically low compared to previous recessions, forecasts were about 1 percentage point higher than a year earlier.

(For other stories from the Reuters Global Economic Survey:)

(Reporting by Prerana Bhat; Poll by Milounee Purohit; Editing by Ross Finley and Paul Simao)

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