A strong U.S. economy is likely to prompt the Federal Reserve to raise interest rates by one more rate this year and keep them at a higher rate next year, according to economists polled by Bloomberg News.
Most read from Bloomberg
The Federal Open Market Committee will keep rates in the 5.25% to 5.5% range at its Sept. 19-20 meeting, the survey showed, and stay there until the first cut next May — two months after economists’ view in July. .
As policymakers update their view of the U.S. economic outlook, the dot plot in the Quarterly Summary of Economic Forecasts predicts one more rate hike this year. However, economists surveyed think the Fed will not go through with the final hike.
Fed Chairman Jerome Powell and his colleagues have signaled plans to end the hikes this month as they wind down the tightening campaign and near the peak. Powell said at the Kansas City Fed conference in Jackson Hole, Wyoming last month that inflation was too high and that central banks were prepared to tighten further if necessary.
A strong economy is shaping the discussion of the September meeting. The member of the Central Committee expects economic growth this year to be 2%, double the forecast of 1% in June and compared to 0.4% seen in March. Additionally, the unemployment rate is now 3.8%, up 0.1 point to 3.9%, or lower than June’s 4.1% rate and March’s 4.5% unemployment rate, which could predict a warmer labor market.
“The most interesting part may be the outlook for future price increases,” Joel Naroff, president of Naroff Economics LLC, said in the survey. “What we have no idea is that the federal funds rate is considered too high.”
The projections are expected to include the committee’s first outlook for 2026, when the median policymaker could see rates at 2.6% by the end of that year, slightly higher than the long-term rate forecast of 2.5%.
In its projections, the Committee is likely to continue to see inflation on the high side, with a year-end forecast of 3.2%. The outlook for inflation, excluding food and energy, improved slightly to 3.8%. The economists predict that policymakers will reach their 2 percent inflation target by 2026.
The survey of 46 economists was conducted September 11-14.
What Bloomberg Economics Says…
“Bloomberg Economics expects the FOMC to keep rates at 5.5% at the September 19-20 meeting, which Fed officials — even the most hawkish — have already telegraphed. The FOMC’s indication of the future path of rates will be more consequential. Positive economic surprises during the meeting It will prompt the authorities to sharply revise down GDP growth forecasts and lower core inflation.
– Anna Wong, America’s chief economist
The economic data surprised growth in recent months, meaning central banks will need to raise rates longer to reduce inflationary pressures as they seek to return inflation to their 2% target. But many don’t anticipate the need for another walk.
“The Fed should take some comfort in overall inflation and wage growth,” said Kathy Bostjancic, chief economist at National Life Insurance Company. “But both are still running too high for complete comfort, so the Fed and Chairman Powell could err on the side of the hawks.”
The FOMC raised its benchmark rate in July from 5.25% to 5.5%, a 22-year high. While the committee made one more hike in its forecasts, economists were split on whether that would happen, with about a quarter looking more bullish.
“Core inflation is excessively high and the economy is performing better than many analysts expected,” said Dennis Shane, senior director at Scope Ratings. The danger for the Federal Reserve is to do too little rather than too much.
Economists have gradually become more optimistic about the US economy, with 45% predicting a recession in the next 12 months, compared with 58% in July and 67% in April. Fed officials shared their soft-landing optimism, shifting from forecasts of a recession at the start of the year to continued expansion.
Almost all economists expect the guidance in the statement to continue, the committee has hinted that further strengthening is possible.
The FOMC will continue to weaken the balance sheet by not replacing maturing bonds, and economists expect this to continue even after the rate cut begins. The median economist expects that to fall to $7.8 trillion in December and $6.8 trillion in 2025.
Most read from Bloomberg Business Week
©2023 Bloomberg LP