Prerana Bhat and Indradip Gosh

BENGALURU, Reuters – A Reuters survey of economists revealed that the U.S. Federal Reserve will raise interest rates by year’s end to a higher level than was anticipated a month ago. This would keep alive existing-significant recession risks.

Although U.S. inflation may have topped in March at its four-decade highest, the Fed’s goal of 2% is still out of reach. Global supply chain disruptions continue to push up prices.

A Reuters poll of May 12-18 showed a close-unanimous consensus for a 50 basis-point increase in the fed funds rates. This rate is currently at 0.75% to 1.00% at the June policy meeting. It follows a similar move earlier in the month. One forecaster predicted a 75-basis point increase.

54 of the 89 economists predict that the Fed will increase its rate by 50 basis points in July. Then, it is likely to slow down to 25-basis-point increases at subsequent meetings. But 18 respondents predicted another half-percentage-point rise in September too.

The majority of respondents to the poll expect that the Fed funds rate will be between 2.50% and 2.755% by 2022. This is six months sooner than was predicted in previous polls, but roughly on par with market expectations of a rate of 2.75%-3.00% at the year’s end.

It would be above the level of activity that does not stimulate nor limit activity (estimated at 2.4%).

Sal Guatieri (senior economist, BMO) wrote that the urgent goal was to get policy rates to neutral before looking back to assess their impact.

The Fed hopes that the inflation pressure resulting from commodity price increases and pandemic effects on labor and materials will soon ease.

Jerome Powell, Fed Chair on Tuesday, stated that the U.S. central banks would increase interest rates as much as necessary and possibly even above the neutral level.

Nearly 75% said that the Fed’s rate-hike path in the next months was more likely than slowing down.

The Consumer Price Index (CPI) forecasts that inflation will average 7.1% in 2018 and stay above the target of the central bank until at least 2024.

New York Fed’s April global supply chain pressure gauge saw an increase in April, after having seen four months of declines. It suggests that these price pressures continue to be very real, and a recent Reuters analysis also suggested this.

The poll found that a 40% chance of the United States going into recession in the next 2 years and a 14% chance for it to happen within the year. These probabilities are stable compared to the previous survey.

The sentiment in the financial markets has not remained constant. It appears that the equities index is on the verge of falling to 20%, down from around its peak at the beginning of this year.

After a contraction in January-March 2019, the U.S. Economy was forecast to recover to 2.9% annualized growth in the second quarter. Forecasts varied widely between 1.0% and 6.9%.

After the 2.8% average GDP growth predicted for this year, it was to slow to just 2.1% in 2023 or 2024 respectively. This is down from the 2.2%, 3.3% and 2.0% predicted last month.

The outlook for the unemployment rate was optimistic. It averaged 3.5% in 2018 and 2019, before rising to 3.7% by 2024.

More than 80% said that they expected unemployment to rise in the future than it is now, 28 out of 34.

The only way to end the wage-price cycle is to increase the unemployment rate. Philip Marey (senior U.S. strategist, Rabobank) stated that if the Fed doesn’t do this intentionally, it will need to do so by design.

A recession is inevitable.

(For more stories, see the Reuters economic poll: