“Policy remains focused on inflation with little evidence of being responsive to slowing economic/employment data or declining rates of inflation,” said Hugh Johnson, chairman of Hugh Johnson Economics LLC.
Inflation remains the central issue driving Fed policy. The FOMC is likely to maintain its forecasts for price pressures and may project inflation of 5.2% for 2022, 2.6% for 2023 and 2.2% for 2024. That would mean missing the Fed’s long-run inflation target of 2% until 2025.
Powell has emphasized that the central bank will be nimble in its rate-hiking plans and the FOMC in its prior statement offered only loose guidance that ongoing increases would be appropriate. Three quarters of the economists expect the committee to repeat the guidance, while most of the rest say the FOMC could say it expects the pace of hikes to slow, echoing Powell’s recent public statements.
Two thirds of economists also expect a unanimous decision this month, with the FOMC keeping a united front behind Powell’s fight against inflation. So far this year, St. Louis Fed President James Bullard has dissented as a hawk and Kansas City Fed President Esther George in a dovish direction.
There’s less certainty around plans to shrink the Fed’s balance sheet. The level at which maturing securities are allowed to expire ramped up this month to an annual pace of about $1.1 trillion. Economists project that will reduce the balance sheet to $8.4 trillion by year end, dropping to $6.6 trillion in December 2024, according to the median estimate.
Almost half of those surveyed say officials will resort to outright sales of mortgage-backed securities, in line with their stated preference to only hold Treasuries in the longer run. Among those expecting sales, there’s a wide range of views on when selling would begin, with a slight majority seeing it start by 2023’s second quarter.
Wall Street economists have continued to raise concerns about the potential for recession as the Fed tightens monetary policy amid headwinds including higher food and energy prices amid Russia’s invasion of Ukraine.
“Higher-for-longer inflation, more-aggressive Fed monetary policy tightening, and negative spillover effects from a weakening global backdrop will combine to push the US economy into a mild recession in the first half of 2023, in our view,” said Oxford Economics chief US economist Kathy Bostjancic.
Economists were mixed about the outlook, with 49% seeing a recession as likely in the next two years, 33% seeing some time with zero or negative growth likely and the rest looking for the Fed to achieve a soft landing of continuing growth and low inflation.
This article was provided by Bloomberg News.