Federal Reserve officials will maintain their resolutely hawkish stance next week, laying the groundwork for interest rates reaching 5% by March 2023, moves that seem likely to lead to a U.S. and global recession, economists surveyed by Bloomberg said.
The Federal Open Market Committee will raise rates by 75 basis points for a fourth consecutive meeting when policymakers announce their decision at 2 p.m. in Washington Wednesday, the survey found.
Officials got further reason to stay the course when U.S. government data on Friday showed employment costs rising at a firm pace in the third quarter and the central bank’s preferred inflation gauge still well above its 2% goal.
Rates are projected in the survey to rise another half point in December, then by quarter points the following two meetings. Fed forecasts released at the September meeting showed rates reaching 4.4% this year and 4.6% next year, before cuts in 2024.
Economists see the Fed as determined not to pivot too soon as it fights against an inflation rate at a 40-year high. The shift to a higher peak rate would reflect consumer-price growth, excluding food and energy, that came in hotter than expected for the past two months. The survey of 40 economists was conducted Oct. 21-26.
“Inflation pressures remain intense and the Fed is set to hike by 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 in December given a weakening economic and market backdrop,” but the risks are skewed toward a fifth 75 basis-point hike, he said.
Fed Chair Jerome Powell has said the central bank is strongly committed to restoring price stability and he’s repeatedly invoked his predecessor, Paul Volcker, who boosted rates to unprecedented levels to counter inflation in the early 1980s. Powell has warned the process will be painful, because the goal is to engineer below-trend growth to reduce price pressures and unemployment will rise as a result.
Powell and his colleagues have not given up hope that they can pull off a soft landing for the economy. But for the first time in the pre-FOMC meeting surveys, a majority of the economists–three-quarters–see a recession as likely over the next two years, and most of the rest see a hard landing with a period of zero or negative growth ahead.
What Bloomberg Economics Says
“I think the most important thing to watch for is how Powell communicates the potential downshift in the pace of rate hikes,” said Anna Wong, chief U.S. economist at Bloomberg. “He will want to avoid giving the impression that a pivot is imminent, especially not when core inflation is clearly still going strong. He would be preparing for the markets for a 50 basis-point hike in December but which will also be accompanied with a dot plot, which shows 5% terminal rate.”
The economists see the Fed as potentially overtightening: The median economist would set a peak target rate at 4.75%, and 75% of the economists said there’s a greater risk that the central bank will raise rates too much and cause unnecessary pain as opposed to not raising enough and failing to contain inflation.