Federal Reserve policy makers are likely to signal a continuing shift to a more hawkish policy fighting inflation with interest rates climbing above 3% in 2023, according to a Bloomberg News survey of economists.
The Federal Open Market Committee will raise rates by 50 basis points next week and by the same amount in July, but then slow the pace of tightening to 25 basis point increments from September, the survey found. Officials were expected to project rates at 2.6% by year’s end and 3.1% in 2023. That compares with 1.9% and 2.8% in their March forecasts. The current target range of the benchmark policy rate is 0.75% to 1%.
The survey of 44 economists was conducted June 3-9. Data released Friday hardened the case for determined Fed tightening: Consumer prices excluding food and energy rose by a larger than expected 0.6% last month and 6% from a year ago, while the headline CPI gauge hit a fresh 40-year high of 8.6% year-over-year.
Chair Jerome Powell has signaled half-point hikes are on the table for this month and next to curb surging prices. But he’s been careful to avoid saying how high they’ll peak, which makes the Fed’s quarterly dot-plot forecast for interest rates a primary focus of investors when officials meet June 14-15. The committee will release a statement and updated economic estimates at 2 p.m. Wednesday and Powell will hold a press conference 30 minutes later.
The rate path the FOMC is projected to lay out by economists is less aggressive than what markets are expecting. Not only are investors pricing in the half-point hikes Powell has repeatedly suggested are likely, they are expecting a similar-sized increase in September and further hikes in November and December.
“We see the Fed raising the Fed funds rate by 50 basis points at each of the June and July meetings before scaling back the pace of tightening to 25 basis points rate increases at the remaining meetings of the year,” Oxford Economics chief US economist Kathy Bostjancic said in a survey response.
Powell is trying to steer the economy toward a soft landing of slower growth, a still robust labor market and low inflation. The economists’ own projections largely match what they see as the “dot plot” with the top of the target range for the policy rate hitting 2.75% in December, 3% at the end of 2023, and a peak rate during the tightening campaign of 3.25%.
The survey of 44 economists was conducted June 3-9.
Inflation remains the central issue driving policy adjustments for the Fed. The committee is likely to raise its forecasts for prices based on the persistence of the problem, and may project increases of 4.9% for 2022, 2.8% for 2023 and 2.3% for 2024. That would mean missing the long-run target of 2% during the entire three-year forecast horizon.
At the same time, the committee’s forecasts might hint at a willingness to slow the labor market as they project slight increases in the unemployment rate in 2023 and 2024 from its projection of 3.5% this year. The jobless rate was 3.6% in May and Powell has described the job market as tight to an unhealthy degree.