BENGALURU- The Federal Reserve will deliver another 75-basis-point interest rate hike next week and likely hold its policy rate steady for an extended period once it eventually peaks, according to a Reuters poll of economists released on Tuesday.
Policymakers have done little to push back on market pricing for a third consecutive rate hike of three-quarters of a percentage point at the US central bank’s Sept. 20-21 meeting, with inflation, as measured by the Fed’s preferred gauge, running at more than three times its 2 percent target.
A strong majority of economists, 44 of 72, predicted the central bank would hike its fed funds rate by 75 basis points next week after two such moves in June and July, compared to only 20 percent who said so just a month ago.
If realized, that would take the policy rate to the 3.00 percent-3.25 percent target range, the highest since early 2008, before the worst of the global financial crisis. The remaining 39 percent still expected a 50-basis-point hike.
The shift in expectations for the larger hike has pushed the dollar to a two-decade high against a basket of currencies.
The US currency was forecast to extend its dominance for the remainder of this year and into early next.
“If there has been a shift in the Fed’s tone in recent months, it has been in the direction of a stronger commitment to reducing inflation, even at the risk of a downturn,” noted Michael Gapen, chief US economist at Bank of America Securities, who was among those polled.
Like many others in the poll, Gapen recently changed his forecast to show the Fed hiking rates by 75 basis points next week instead of half of a percentage point.
But raising borrowing costs so quickly comes with its own risks. The poll put the probability of a US recession over the coming year at 45 percent, unchanged from the previous forecast, with the chance of one occurring over the next two years rising to 55 percent from 50 percent.
The world’s No. 1 economy, which has seen its gross domestic product contract in the past two quarters, was expected to grow below its long-term average trend of 2 percent until at least 2025, according to the poll.
Economists said the interest rate outlook for the September meeting could change if inflation drops. The US Labor Department is due to release consumer price index data on Tuesday, with economists polled by Reuters forecasting the CPI would rise 8.1 percent in the 12 months through August.
The CPI jumped 8.5 percent in the 12 months through July.W hether or not the Fed slows its monetary tightening, either through a 50- or 25-basis-point hike at its Nov. 1-2 policy meeting, is on a knife’s edge, the poll showed.
A majority of the economists, however, expected the central bank to opt for a 25-basispoint hike at its Dec. 13-14 meeting.
There was still no consensus among economists on where and when the Fed will stop hiking rates, and similarly there was no consensus on when it would start cutting them.
Among the economists who had a view through the end of 2023, 47 percent forecast at least one rate cut, down from 57 percent in a poll last month.
Once the fed funds rate reaches a peak, the central bank is more likely to leave it unchanged for an extended period rather than cut it quickly, according to more than 80 percent of respondents who answered an additional question.
