Prerana and Indradip Bhat

BENGALURU (Reuters – Two back-to-back quarter-point increases of interest rates by the Federal Reserve are expected in May, and June. This is to curb runaway inflation. Economists polled to Reuters also believe that there’s a 40% chance for a recession next fiscal year.

Most analysts believe the Fed should act fast to control price inflation, given the fact that there is a near record-low unemployment rate and an inflationary spike in the global commodities market.

A Reuters poll that surveyed more than 100 economists on April 4-8, 2008, forecasts two rate increases of half a point this year. This is the first time since 1994. It will raise the federal funds rate from 1.25% to 1.50% at the June meeting.

The March Reuters poll’s end-year predictions are now at least three to four months in advance, more or less in line with futures pricing for interest rates.

Strong majority (85 of 102) predicted 50 basis points in May. A solid majority of 56 forecast that the Fed would add 50 basis points to its June prediction.

James Knightley is chief international economist for ING. “Given our shift in official comment and inflation pressures evident throughout the economy, it’s likely that the Fed will offer half-point interest rates increases at the May June and July policy meeting,” he said.

Jerome Powell is expected to reduce quarter-point moves at the central bank in the second half this year. However, the fed funds rate will end 2022 at 2.00%-2.255%. This is 50 basis points more than what was predicted in a poll last month.

There are risks associated with moving so fast with interest rates in an economy used to low borrowing costs over many years.

Knightley stated that “the Fed appears to feel the need to ‘catch-up’ in order to regain control over inflation and inflation expectations,” adding Knightley.

RAPID SLOWING

Respondents to an additional question stated that a one in four chance exists of the United States going into recession within the year. This number rose to 40% during the following 24 months. Already signs are beginning to point towards a recession on the bond markets. [US/INT]

According to Reuters, this partly explains why there has been a slowing down in rate hikes over the next year. There have been 50 basis point cumulative rate increases, bringing Fed funds rates to 2.5%-2.75% at the end 2023.

Some economists already predict lower interest rates in the fourth quarter next year.

However, inflation did not fall to the Fed’s target of 2% despite expectation for an aggressive tightening policy. This was at least until 2024.

Inflation is hard to predict because of Russia-Ukraine’s war. This has caused commodity and energy price rises.

The Consumer Price Index (CPI), which measures inflation, was forecast to reach 7.9% for the quarter ended last year and 6.8% in 2018, a notable improvement on 6.1% last month.

U.S. unemployment rates are expected to continue tightening after they fell to 3.6% last week, just slightly below pre-pandemic levels. This is also the average rate it will be in 2022.

According to the Fed, the unemployment rate is expected to be 3.5% in 2020 and then stay at that level in 2024. This was in keeping with its optimistic outlook and does not reflect respondents’ fears about a recession.

All growth forecasts have been downgraded. According to the latest forecasts, the economy will grow by 3.3% and 2.2% next year respectively. This is down from last month’s prediction of 3.6% and 2.4%.

(For additional stories about the Reuters global economy poll, click here