According to the majority of academic economists, the US Federal Reserve will surprise investors and raise interest rates at least by another quarter point.
Over 40 percent of respondents said they expect the Fed to increase rates at least twice from the current benchmark of 5.25-5.5%, which is a 22-year-high.
The mood on the financial markets is quite different. Traders in federal funds futures think that the US central banks policy settings are restrictive enough to keep inflation under control, and therefore it can hold rates well into 2024.
The Survey, conducted by the Kent A Clark Center for Global Markets, University of Chicago Booth School of Business in partnership, indicates that to fully eliminate price pressures and bring inflation down to 2%, more borrowing costs will be required than what market participants are currently anticipating.
“We’re receiving some signals that the policy isn’t that tight,” said Julie Smith. She’s a professor of Economics at Lafayette College. Smith noted that housing markets, which are sensitive to interest rates, have remained “surprisingly” strong despite earlier losses.
It doesn’t appear that consumers are pulling back enough to slow down the economy. I believe this is the real issue.
About 90 percent of the 40 respondents surveyed between September 13 and 15, believe that the Fed still has work to do.
Nearly half the economists polled predicted that the Fed Funds Rate would reach a peak of 5.5-5.75 percent, which is a quarter-point increase.
Another 35 percent expect that the Fed will move the benchmark rate up by two quarter-points, to between 5.75 and 6.0%.
Only 8% of respondents believe that the policy rate will exceed 6 percent.
The economists polled were unanimous in their belief that once rates reach their peak, they would be held there by the Fed for a long time. Around 60% of those surveyed thought that the first rate cut would be in the third quarter or later of next year.
This is almost double the number of economists polled in June who had predicted this timeframe.
The survey is just days away from the next Fed policy meeting where it is expected that the Fed officials will again refrain from taking any further action.
Since March 2022, the rapid tightening of policy has been the most aggressive attempt to reduce demand for decades.
While pressures on inflation have weakened and the labour market has softened, many economists surveyed are concerned that the momentum of the world’s biggest economy is too strong. They fear that inflation may become more difficult to control.
Gordon Hanson is a Harvard Kennedy School professor. He said: “Just as there were concerns that the Fed was slow to act, you don’t wish for the Fed to be overly relaxed.”
Since June, the respondents to the survey have doubled their estimates for economic growth in 2019. The median estimate is now 2 percent.
The Fed’s preferred measure of inflation — the Personal Consumption Expenditures Price Index after removing food and energy costs — is expected moderate to 3.8%. As of the most recent data, it is at 4.2 percent.
Only a third of respondents thought it was “very” or’somewhat” likely that the core inflation rate would surpass 3 percent by 2024. Most people thought it was likely to happen.
They said that the greatest risk to inflation is a curtailment in oil supply.
Christiane Baumeister is a professor from the University of Notre-Dame who worries about the energy prices following the decision of Saudi Arabia and Russia. She believes that prices will continue to rise, which could increase expectations for future inflation and delay the decline in core price growth.
This could be offset by the sharp decline in China’s economic growth, which is expected to slow down global growth over the next few months.
Demand could be further impacted by domestic headwinds such as the repayment of student loans and the threat of a shutdown of the government.
Sebnem Kaledi-Ozcan is an economist from the University of Maryland, and a member of New York Fed’s economic advisory panel. He is one of many economists who were polled to believe that the neutral rate of interest, a level which neither stimulates or suppresses the growth, is higher for the moment than it was in the past.
She said that this will delay the Fed’s ability to reduce its policy rate in 2013.
She said, “Even though it feels higher to us, we do not know how high R-star really is at the moment.”
The survey of economists has shown that they are more optimistic than ever about the chances of a “soft landing” where the Fed will be able to bring down inflation without causing excessive job losses.
Over 40% of respondents thought it was “somewhat likely” that the inflation rate could be brought down to 2% without the unemployment rate exceeding 5%. A quarter of respondents thought it was “about equally likely”.
Many people pushed their predictions back further when asked to estimate the time of the next recession.