(Bloomberg) – Federal Reserve officials will maintain their firm hawkish stance next week and set the stage for interest rates to reach 5% by March 2023, moves likely to result in a U.S. and global recession, economists said who were surveyed by Bloomberg.
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The Federal Open Market Committee will hike rates by 75 basis points for a fourth straight meeting when policymakers announce their decision at 2 p.m. Wednesday in Washington, according to the poll.
Officials got further reason to stay the course when US government data on Friday showed that job costs rose at a steady pace in the third quarter and the central bank’s preferred inflation gauge was still well above its 2% target.
Rates are expected to rise another half point in the survey in December, then quarter points in the following two sessions. Fed forecasts released at the September meeting showed rates would hit 4.4% this year and 4.6% next, before being cut in 2024.
Economists see the Fed determined not to turn around too soon as it battles inflation at a 40-year high. The shift to a higher peak rate would reflect hotter-than-expected consumer price growth excluding food and energy over the past two months. The survey of 40 economists was conducted on October 14th. 21-26.
“Inflationary pressures remain elevated and the Fed is expected to hike 75 basis points in November,” James Knightley, chief international economist at ING Groep NV, said in a survey response. “We are currently forecasting a more muted 50 basis point hike. December offered a weaker economic and market backdrop,” he said, but risks are towards a fifth 75 basis point hike.
Fed Chair Jerome Powell said the central bank was determined to restore price stability and he has repeatedly cited his predecessor Paul Volcker, who raised interest rates to unprecedented levels in the early 1980s to stem inflation. Powell has warned that the process will be painful as the goal is to achieve below-trend growth to ease price pressures and unemployment will rise as a result.
Powell and his colleagues have not given up hope that the economy will have a soft landing. But for the first time in the polls ahead of the FOMC meeting, a majority of economists – three-quarters – see a recession as likely in the next two years, and most others see a zero-period hard landing or negative growth.
What Bloomberg Economics Says…
“I think the most important thing to watch for is how Powell communicates the possible slowdown in the pace of rate hikes. He will want to avoid giving the impression that a turnaround is imminent, especially when core inflation is clearly still strong. It would set the markets up for a 50 basis point hike in December but also accompanied by a dot chart showing a 5% closing rate.”
— Anna Wong, Chief US Economist
Economists see the Fed as potentially too tight: the median economist would set a top target rate of 4.75%, and 75% of economists said there was a greater risk the central bank would hike rates too much and cause unnecessary pain than not raising enough and not curbing inflation.
“Policy lag is still underestimated,” said Thomas Costerg, senior US economist at Pictet Wealth Management. “The full impact of the current tightening may not be felt until mid-2023. By then it might be too late. The risk of political error is high.”
There could also be economic implications for global markets, with two-thirds expecting a global recession in the next two years.
While the median of economists expect a 50 basis point hike in December, that’s close as almost a third are targeting a 75 basis point hike.
The rate path expected by economists is similar to that predicted by the markets. Investors expect a 75 basis point hike on Wednesday, are trending for a 50 basis point hike in December and expect rates around 4.8%.
If the Fed delivers another 75 basis point move next week, the combined 375 basis point rise since March would represent the steepest rise in Fed rates since the 1980s, when Volcker was chairman and battling sky-high inflation.
“As the Fed faces a choice of doing too much or doing too little, members are likely to choose to do too much,” said Joel Naroff, president of Naroff Economics LLC, aiming to bolster persistent inflation avoid the Volcker faced with the 1970s.
Economists expect the Fed to continue its announced balance sheet cuts, which began in June this year with maturing securities being settled. The Fed is shrinking its wealth by up to $1.1 trillion a year. Economists expect the balance sheet to grow to $8.5 trillion by the end of the year and decline to $6.7 trillion in December 2024.
There is narrow disagreement over whether the Fed will sell mortgage-backed securities as part of the cuts, with 57% expecting the move and lacking consensus on when.
The FOMC statement is expected to keep its language, which includes guidance on interest rates promising steady hikes, with no details on the size of the adjustments, although a quarter are looking for softer language signaling smaller hikes.
Almost a third of economists expect a dissent at the meeting, which would be the third in 2022. Kansas City Fed President Esther George disagreed with a smaller rate hike in June, warning that moving interest rates too abruptly could undermine the Fed’s ability to achieve its planned rate path. St. Louis Fed President James Bullard dissented as a hawk in March.
Barring slower rate hikes, economists expect the Fed to eventually change course in response to lower growth and inflation. Most see a small first rate cut in the second half of 2023, with larger cuts in 2024.
(Updates with labor cost index and PCE data in third paragraph.)
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