BENGALURU – The US Federal Reserve will tighten monetary policy at a much faster pace than thought a month ago to tame persistently high inflation, now viewed by economists polled by Reuters as the biggest threat to the US economy over the coming year.
Encouraged by apparent lower severity of the Omicron variant, governments and central banks around the world are attempting to push their economies back into some version of normality. Fed Chair Jerome Powell said recently he sees an economy that “functions right through these waves of COVID-19.”
Eager instead to control raging inflation, which hit a near 40-year high in December, and further tightening in the labor market, several Fed officials recently signaled interest rate rises are coming very soon.
Median forecasts from the Jan. 12-19 Reuters poll showed the Fed raising its key interest rate three times this year, starting in March, to 0.75-1.00 percent by end-2022, a significant upgrade from two hikes predicted in the December survey.
A strong minority, 40 of 86 analysts, expected the central bank to hike at least four times this year, in line with current market pricing.
Nearly three-quarters of respondents, 37 of 51, predicted the Fed to start reducing the size of its nearly $9 trillion balance sheet by the end of the third quarter. Eleven respondents said it would begin in the second quarter, 26 said in the third and the remaining 14 said later.
“It’s almost as if, all at once, the Fed has realized that policy has been left too accommodative, for too long,” wrote Robert Kavcic, senior economist at BMO Capital Markets in a note to clients. “To their credit, if they’ve realized a mistake, they’re going to fix it – and fix it fast.”
Three more interest rate hikes are forecast in the first three quarters of 2023, the poll found.
With rates still on the floor at 0.0-0.25 percent, inflation has already risen significantly, a common problem most central banks across the world are struggling to contain.
The core personal consumption expenditure (PCE) price index, the Fed’s key inflation gauge, hit 4.7 percent in November, its highest since 1989, and is forecast to average 4.9 percent this quarter.
It is forecast to drift downward from there, but remain above the central bank’s 2.0 percent target for at least the next three years.
Consumer price index (CPI) inflation, at 7.0 percent, is already at its highest in 40 years, underscoring how much of a focus price rises have become after decades of historically low inflation.
Two-thirds of respondents, 25 of 38, said persistently higher inflation posed the biggest risk to the US economy over the next 12 months. – Reuters
