Federal Reserve officials will signal a more hawkish stance next week, with interest rates reaching 4% by December and staying high through 2023, economists surveyed by Bloomberg said.
The Federal Open Market Committee will raise rates by 75 basis points for a third consecutive meeting when policy makers announce their decision at 2 p.m. in Washington Wednesday, the survey found.
That would lift the target range for their policy benchmark to 3% to 3.25%. Fed forecasts released at the meeting are expected to show the upper bound of the range at 4% by year-end and edging higher next year, before cuts in 2024 take it back to 3.6%.
Such a shift represents a big step up from Fed forecasts in June, reflecting a tougher fight against inflation after August core consumer-price growth came in hotter than expected. The survey of 45 economists was conducted Sept. 9-14.
Chair Jerome Powell has said the Fed is strongly committed to getting inflation back to the central bank’s 2% target, and won’t stop its fight prematurely in the face of weaker economic data. The case for more aggressive action has been solidified by Tuesday’s consumer price index report, which showed measures of underlying inflation rising more than expected.
“We expect the Fed to continue hiking until realized inflation prints come down, with the August CPI release adding substantial urgency to the Fed’s task,” said Robert Dent, senior US economist at Nomura Securities International Inc. “The longer inflation stays elevated, the more concerns of a wage price spiral and/or inflation expectations unanchoring rise.”
Powell has been vague about how high interest rates might go and in July said the Fed would make policy “meeting by meeting.” That makes the FOMC’s “dot plot” forecasts of the target rate a primary focus for investors when the committee meets Sept. 20-21. Powell will hold a press conference Wednesday, 30 minutes after the policy decision is released.
The rate path which economists expect the FOMC to lay out next week is less aggressive than the one foreseen by markets. Investors fully expect a 75 basis-point increase on Wednesday and see rates advancing a further percentage point by year end to around 4.23%.
The economists’ own forecasts largely match what they expect from the Fed’s Summary of Economic Projections, with rates peaking at 4% in December, then declining in 2024.
Powell is trying to steer the economy toward a “softish” landing of slower economic growth, a still-robust labor market and weaker inflation. That will be reflected in FOMC forecasts for growth of just 0.5% in 2022 and 1.4% in 2023 -- both big downgrades from June -- with unemployment rising to 4.2% in 2024 from 3.7% reported in August, according to the survey.