The Federal Reserve will continue to raise its benchmark policy rate, keeping it above 5.5% for the rest of the year, despite turmoil in the U.S. banking sector, according to a majority of leading academic economists polled by the Financial Times.
The latest survey, conducted in partnership with the University of Chicago Booth School of Business’s Initiative on Global Markets, suggests that the US central bank still has work to do to stamp out stubbornly high inflation, even as it does facing a crisis among mid-sized lenders. following the implosion of the Silicon Valley Bank.
Of 43 economists surveyed between March 15 and March 17 — just days after U.S. regulators announced emergency measures to stem the contagion and strengthen the financial system — 49% expect the federal funds rate to peak between 5 .5% and 6% this year.
This represents an increase from 18% in the previous survey in December and compares to the current level of the rate, which is between 4.50% and 4.75%.
16% believed it would cap at 6% or higher, while about a third thought the Fed would stop below those levels and cap its so-called “terminal rate” below 5.5%. Additionally, nearly 70% of respondents said they did not expect the Fed to make any cuts until 2024.
The policy trajectory projected by most economists is significantly more aggressive than current expectations reflected in fed funds futures markets, underscoring the uncertainty clouding not only the Fed’s rate decision on Wednesday, but also the trajectory during of the next few months.
Since last Friday, traders have discounted how much more the Fed would compress the economy given concerns over financial stability. They are now betting that the central bank will only raise its key rate by another quarter of a percentage point before concluding its tightening campaign. This would result in a terminal rate just below 5%. They also raised bets that the central bank would quickly reverse course and implement cuts this year.
“The Fed is really caught between a rock and a hard place,” said Christiane Baumeister, a professor at the University of Notre Dame. “They have to keep fighting inflation, but now they have to do it amid high stress in the banking sector.”
Baumeister, who participated in the survey, however, urged officials not to “prematurely” halt their monetary tightening campaign, calling it “a matter of maintaining the Fed’s credibility as an inflation fighter.”
About half of respondents said events associated with SVB caused them to cut their forecast for the federal funds rate by the end of 2023 by 0.25 percentage points. About 40% were evenly split between the rout causing no change or possibly more tightening at the end versus half a point of easier central bank policy.
A majority felt that the measures taken by government authorities were “sufficient to prevent further bank runs during the current cycle of interest rate tightening”.
Jón Steinsson of the University of California, Berkeley was one of the panelists to conclude that the Fed and its regulatory counterparts had been successful in containing the turbulence and said “it would be a mistake to significantly alter the tightening cycle.”
The more hawkish stance stems from a more pessimistic view of the inflation outlook.
Most economists polled expect the Fed’s preferred indicator – the core personal consumption expenditure price index – to remain at 3.8% by year-end, or around a percentage point lower than its January level, but still well above the central bank’s 2% target. . In December, the median estimate of core PCE for the end of 2023 stood at 3.5%.
In fact, almost 40% of respondents said it was “somewhat” or “very” likely that core PCE would exceed 3% again by the end of 2024. That’s about double the from December.
Deborah Lucas, a finance professor at the Massachusetts Institute of Technology who took part in the survey, said she had a more favorable view of the inflation outlook, but warned that the Fed’s tools were largely ineffective in addressing this. which she sees as a supply-side problem. shocks, “aggressive” fiscal policy and high savings among Americans.
“What the Fed will do if it raises interest rates too aggressively is it will cut needed investment and do very little about inflation,” she said.
An ongoing debate centers on the extent of the ongoing credit crunch across the country as the regional banking sector seizes up.
Stephen Cecchetti, an economist at Brandeis University who previously headed the monetary and economic department at the Bank for International Settlements, said he expects to see demand as a whole “retreat.”
“Financial conditions are tightening without them doing anything,” he said of the Fed.
A slim majority expects the National Bureau of Economic Research – the official arbiter of the start and end of US recessions – to declare one in 2023, with the majority believing it will occur in the third or in the fourth trimester. In December, a majority thought it would happen in the second quarter or earlier.
Still, the recession is expected to be shallow, with the economy continuing to grow by 1% in 2023. The unemployment rate, meanwhile, is expected to reach 4.1% by the end of the year, from its current level. by 3.6%. . It will eventually peak between 4.5% and 5.5%, estimate 61% of economists.