26 April 2024

Economists See Two More Fed Rate Increases This Year

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Most private economists see the Federal Reserve raising short-term interest rates two more times this year, once in September and again in December, according to The Wall Street Journal’s monthly survey of forecasters.

Of the 57 economists who responded to the survey, 88% expect two more quarter-percentage-point increases to the Fed’s overnight lending target this year, to a range between 2.25% and 2.5%. That is up from 84% of economists in last month’s Journal survey.

The forecasts reflect an economy that has shown little sign of slowing after the Fed raised rates in March and June. U.S. gross domestic product expanded at a 4.1% annual rate in the second quarter, its fastest clip in nearly four years. Job creation has continued to outpace growth in the labor force, pushing unemployment near its lowest levels since the 1960s. Meantime, the Fed’s preferred measure of inflation has firmed near its 2% target, though wage growth has remained modest, suggesting a significant inflation overshoot isn’t in the cards.

Central bank officials have appeared split on whether they will raise rates once more in 2018 or twice. In June, eight Fed officials projected they would raise rates at least twice more this year while seven said once or less. Futures markets, meanwhile, put about a 68% probability for at least two rate increases by the end of the year, according to CME Group .

The survey’s median projection puts the benchmark federal-funds rate at 3% by the end of next year, with it remaining near that level into 2020.

Estimates for the benchmark policy rate by the end of 2020 increasingly vary.

Société Générale ’s Stephen Gallagher sees the Fed starting to ease policy after next year to combat a projected slowdown in growth, bringing the fed-funds target to between 1.25% and 1.5% by December 2020.

Parsec Financial’s James F. Smith, meanwhile, anticipates the Fed will continue raising rates at every other policy meeting through the end of the survey horizon, putting the benchmark rate at between 4.25% and 4.5% at the end of 2020.

“They’ll keep raising rates until the Treasury yield curve inverts,” Mr. Smith said, referring to a market phenomenon whereby long-term bond yields dip below shorter-term yields. Historically, this has indicated that a recession was looming.

The economists surveyed by the Journal expect a slightly more cautious path for rate increases than the Fed itself. Whereas most economists see the Fed hitting the brakes after next year, the median projection of Fed officials in June called for one more increase in 2020 to bring the fed-funds rate to between 3.25% and 3.5%, according to the central bank’s quarterly summary of economic projections.

Moreover, while Fed statements have repeatedly highlighted “balanced” risks to growth forecasts, 58% of the economists surveyed by the Journal said they saw a heightened chance of having to revise their growth forecasts lower in the next 12 months, while 31% said growth forecasts might need to be revised higher.

Most economists cited concerns about confrontational U.S. trade policy when asked to identify the biggest downside risk to the growth outlook. A small number of the economists also pointed to the Fed itself, expressing worries that monetary policy errors could lead to too much inflation or a recession.

Rajeev Dhawan, a professor and economic forecaster at Georgia State University, mentioned both concerns in what would be a double whammy.

“A surefire recipe for recession: Trump’s tariff bazooka misfires and the Fed blindly keeps hiking,” Mr. Dhawan wrote.

Click here for the original article from The Wall Street Journal.

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