The economists expect the Fed to eventually step up its reductions in its balance sheet, which started this June with the runoff of maturing securities. The Fed is phasing in its reductions to an eventual pace of $1.1 trillion a year. Economists project that will bring the balance sheet to $8.4 trillion by year end, dropping to $6.5 trillion in December 2024.
Most 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 most seeing it start in 2023 or later.
At the July meeting, the FOMC statement is expected to retain its language giving guidance on interest rates that pledges ongoing increases, without specificity on the size of the adjustments.
Most economists expect one dissent at the meeting. Kansas City Fed President Esther George, who dissented at the last meeting in favor of a smaller hike, has warned that too-abrupt changes in interest rates could undermine the ability of the Fed to achieve its planned rate path.
Wall Street economists have recently been raising more concerns about the potential for recession as the Fed tightens monetary policy amid headwinds including high energy prices and Russia’s invasion of Ukraine.
“The Fed is between a rock and a hard place; we can’t get out of the inflationary environment we are in with out suffering some pain and scars,” said Diane Swonk, KPMG LLP chief economist.
The economists are mixed about the outlook, with 48% seeing a recession as likely in the next two years, 40% 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.
While Fed officials have said they see persistently high inflation as the greatest risk they face, economists are divided, with 37% seeing inflation as the biggest risk and 19% seeing too much tightening leading to recession as the greater worry. The rest see the concerns as about equal.
Beyond slowing rate hikes, the economists see the Fed eventually reversing course in response to lower growth and inflation. A plurality of 45% see the first rate reductions in 2023’s second half, while 31% expect cuts in the first half of 2024. By contrast, markets see peak rates reached by the first quarter of 2023, with a cut later in the year.
“Inflation should start to fall quickly from next March onwards as housing, used cars and gasoline prices look more favorable in year over year terms,” said James Knightley, chief international economist at ING Financial Markets. “This could open the door to a 2Q rate cut.”