Fed to wait until 2023 to raise rates, but there is a risk of an anticipated hike

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The Federal Reserve Building stands against a blue sky in Washington, USA, May 1, 2020. REUTERS / Kevin Lamarque / File Photo

BENGALURU, Oct.20 (Reuters) – The Federal Reserve will wait until 2023 before raising interest rates, according to a majority of economists in a Reuters poll which nonetheless said the greatest risk to the US economy was ever higher inflation over the coming year.

While half of the members of the U.S. central bank’s policy-making committee last month predicted that the Fed would hike its overnight key rate – the federal funds rate – next year, most economists polled were more careful.

The survey was conducted October 12-18.

“We continue to expect the Fed to remain patient. We continue to expect no fund rate take-off until the end of 2023, but the exact timing will depend critically on how the outlook evolves as more. more data will be released, “said Jim O’Sullivan, chief US macro strategist at TD Securities.

Forty of 67 economists said the federal funds rate would rise from its current level of 0 to 0.25% in 2023 or later, with most focusing around the first quarter of this year. The remaining 27 economists expect a rate hike by the end of next year.

Reuters poll: outlook for the US economy

Pent-up consumer demand in a reopening economy is increasing price pressures at a time when global supply chains, disrupted by the coronavirus pandemic, are causing widespread inventory shortages.

High inflation is a concern for many central banks, some of which have already raised their rates or are about to do so. The Fed, for its part, is expected to announce next month that it will start slashing the $ 120 billion in monthly bond purchases it made to stem the economic fallout from the pandemic.

Twenty-nine of the 37 economists who responded said the risk for the time of the Fed’s first interest rate hike was that it could come sooner than expected.

“Unfortunately, we doubt that supply chain issues and labor market shortages will be resolved quickly, so inflation will remain high until 2022. Given this situation, we expect a rise interest rates in September and December next year, “said James Knightley, chief international economist. at ING.

Twenty-two of 40 economists who answered a supplemental question said the biggest worry for the U.S. economy over the coming year was ever higher inflation, and 30 percent of them said that ‘this was a bigger-than-expected growth slowdown.

Consensus on the non-food and energy personal consumption expenditure (PCE) price index, one of the Fed’s main inflation indicators, indicated above-target inflation through the end of the year. next year, although it slows down in the second half of 2022, with economic growth.

“We are raising core inflation estimates a bit, reflecting the current imbalances between supply and demand,” said O’Sullivan of TD Securities.

“Yes, inflation projections for 2021 keep rising, but the Fed’s policy needs to be positioned appropriately depending on where the economy is heading, not where it has been.”

After increasing 6.7% in the second quarter on an annualized basis, US economic growth is expected to slow to 3.8% in the third quarter before increasing 5.0% in the current quarter. This compares to the 4.4% and 5.1% forecast in September for the third and fourth quarters, respectively.

On average, the economy is expected to grow 4.0% next year, 2.5% in 2023 and 2.2% in 2024. This compared to previous forecasts of 4.2% for 2022 and 2.3% for 2023. The September poll did not ask for a forecast for 2024..

The dilemma for Fed policymakers, who are tasked with aiming for stable inflation as well as maximum employment, is whether early rate hikes to keep inflation from skyrocketing could potentially sacrifice further gains from jobs.

The unemployment rate is expected to hover between 3.6% and 4.7% until at least the second half of 2023, with only a handful of economists predicting it will drop to where it was before the pandemic.

(For other articles from Reuters Global Economic Survey:)

Reporting by Shrutee Sarkar; Poll by Mumal Rathore, Arsh Mogre and Sarupya Ganguly; Editing by Ross Finley and Paul Simao

Our Standards: The Thomson Reuters Trust Principles.

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