Prerana Bhagat

BENGALURU, Reuters – In March, the U.S. Federal Reserve is expected to begin its tightening cycle with a 25 basis-point rise in interest rates. However, a Reuters poll found that a rising number of economists believe it will choose to make a half-point more aggressive move to reduce inflation.

Although inflation continues to rise around the globe, it has been particularly strong in the United States. It reached a forty-year high last month.

The Fed is under pressure to increase rates, not just from their record low but to also decrease its $9 trillion-plus balance sheet. This was dramatically inflated with emergency bond purchases that were made by the Fed in order to save the economy’s health from COVID-19.

All 84 participants in a Reuters poll conducted February 7-15, expected that the Fed will raise the federal funds rates by at least 25 basis point at the March 15-16 meeting.

Nearly a quarter (20%) of the respondents predicted a 50 basis-point rise to 0.50-0.75% after market debates over the last week, when Fed officials had discussed the benefits of such an increase. Rate futures price in a more than 50% probability of a half-point increase.

They were predicted to go up each quarter to 1.25-1.50% at end-December. That’s roughly the rate that they were two years ago when they first became a pandemic. Rates were higher for 21 out of 84 respondents by the end of 2022, accounting for 25% of those surveyed.

Ethan Harris (NYSE:) Securities head of global economics, said that inflation is a risk.

“I think that the Fed is behind. According to me, the Fed should’ve started hiking in fall last year. They have some work ahead of them.

GRAPHIC: Change in federal funds rate forecasts, https://fingfx.thomsonreuters.com/gfx/polling/lbvgnweojpq/Reuters%20poll%20graphic%20on%20March%20federal%20funds%20rate%20forecasts.PNG

Also, the Fed could expect to reduce its balance sheets faster than the previous cycle. This would be possible as it was only a few short months after raising the rate.

Based on the median of 27 responses, the poll found that Fed officials would cut $60 billion each month from their portfolio. They also predicted that it could go as low as $20 billion to $100billion.

It follows a $120-billion-per-month buying pace during the peak pandemic-related stimulus. After this “quantitative tightening”, respondents estimated that the Fed’s balance would be between $5.5 trillion and $6.5 trillion.

While this will leave central banks’ balance sheets about 30% less, it will still be more substantial than the one before the pandemic, approximately $4 trillion.

The poll respondents said that it would not represent a normal cycle of interest rates.

The Fed was not only expected to keep it short but also a neutral interest rate, which is neither stimulating nor braking down on activity.

Based on median forecasts from additional question, respondents put both their terminal rate and estimated neutral rate at one level.

It was predicted that the terminal rate would be attained by end-2024. This is a fast tightening cycle based on historical standards. But it also comes with risks.

According to Philip Marey (senior U.S. strategist, Rabobank), “Since no one knows exactly where the neutral rate is”, the Fed can get into restrictive territory sooner than it realizes and could eventually lead to recession.”

However, it was still not anticipated that the Fed would achieve its inflation target of 2% until at least 2024.

Core personal consumption expenditure price index (PCE), the Fed’s preferred indicator of inflation, is expected to be 3.9% and 2.4% next year, respectively, and then fall to 2.1% by 2024.

The average headline inflation in the quarter was 7.1%, with 2.3% at the end next year. It will then fall to 2.3% by 2020. Average 5.0% and 2.5% for 2022 and 2023 respectively.

GRAPHIC: U.S. inflation and interest rates, https://fingfx.thomsonreuters.com/gfx/polling/egpbklxmqvq/Reuters%20poll%20graphic%20on%20U.S.%20inflation%20and%20interest%20rates.PNG

In the third quarter of 2013, growth was affected by disruptions to economic activity due to a spike in COVID-19 case numbers. These events are likely to happen again this quarter.

The quarter’s growth was lowered for the fourth month in a row to 1.6% annually. This was to recover to 3.8% by the end of next quarter before slowing down gradually.

A January poll showed that economic growth would average 3.7% to 2.5% in this and the next year, respectively.

(To see more stories about the Reuters global economy poll, click here