Federal Reserve Chair Jerome Powell is likely to slow the pace of interest-rate increases after front-loading policy with a second straight 75 basis-point hike next week, economists surveyed by Bloomberg said.
They expect the Federal Open Market Committee to lift rates by a half percentage point in September, then shift to quarter-point hikes at the remaining two meetings of the year. That would lift the upper range of the central bank’s policy target to 3.5% by the end of 2022, the highest level since early 2008.
For the September meeting, the survey is slightly more dovish than interest-rate futures in financial markets, which are currently pricing in above a 50% chance of a 75 basis-point increase, assuming a 75 basis-point move next week. But the broader path envisioned by economists is slightly more hawkish than the one implied by market pricing.
It’s also steeper than what was expected prior to the June meeting, when the FOMC forecast rates rising to 3.4% at year’s end and 3.8% in 2023.
June’s 75 basis-point hike was the largest increase since 1994. Powell has said either 50 or 75 basis points would be on the table at the Fed’s July 26-27 meeting, though comments by many policy makers have centered on a 75 basis-point move.
The survey of 44 economists conducted from July 15 to 20 forecast the Fed will raise rates by another 25 basis points in early 2023, reaching a peak of 3.75% before pausing and starting to cut rates before the end of the year.
“The still strong labor market and solid consumer spending provide the leeway for the Fed to continue to quickly raise the policy rate,” Oxford Economics chief US economist Kathy Bostjancic said in a survey response.
There’s an overwhelming consensus that the FOMC will raise 75 basis points this month, with just one forecaster -- the US economics team at Nomura Securities -- looking for an increase of a full percentage point. Fed Governor Christopher Waller, one of the more hawkish policy makers, has endorsed a 75 basis-point move, and Atlanta Fed President Raphael Bostic warned that moving too dramatically would have negative spillover effects.
The Fed is seeking to cool off economic demand in response to surging prices that have persisted longer than expected and raised concern that inflation expectations could become unhinged. The consumer price index rose 9.1% in June from a year earlier in a broad-based advance, the largest gain since 1981.
If the Fed does deliver another 75 basis-point move next week, the combined increase of 150 basis points over June and July would represent the steepest rise in Fed rates since the early 1980s when Paul Volcker was chairman and battling sky-high inflation. There’s no appetite for a full-point increase at any time during this rate cycle, in the view of almost all the economists in the survey.