Prerana Bhat, Indradip Ghosh

BENGALURU, (Reuters) – The U.S. Federal Reserve is expected to raise its key interest rates by 50 basis points between June and July. There are increasing chances that it will do the same in September according to Reuters poll. Economists believe there will be no pause in rate increases until next year.

The Fed must quickly adjust its policy rate so that it neither stimulates or restricts inflation, which is just below the four-decade mark.

In a June 6-9 Reuters survey, 85 economists predicted a federal funds rate increase of 50 basis points to 1.25%-1.500% Wednesday. This follows a similar move in July. All survey respondents except a few predicted another such increase for July.

More than half of the respondents (59 out of 85) expected a 25-basis point increase in September. However, 23 percent of those surveyed saw the Fed hike again by half an point. This is an increase of one-fifth from the last month’s sample.

Ethan Harris, Bank of America’s global economist (NYSE:) Securities stated that “The bad news about the Fed is that inflation now is so high above target that they have little choice but tighten aggressively.”

On average, 43 respondents to an extra question predicted a 50% likelihood of a September 50 basis-point hike. There was a 25% and 30% probability of a similar move in November, and 25% respectively for December.

Nearly 60% responded to an extra question. 24 out of 41 respondents said that they believed the Fed would stop raising rates during the first and second quarters of next year. The second half of the year or later was answered by nine respondents, and the remainder said this year.

However, analysts still see the Fed Funds Rate exceeding 2.4% neutral by year end, to 2.50-2.75%. That is slightly less than the market’s expectations of 2.75%-3.00%.

It is expected to attain a terminal level between 3.00% and 3.25% by the end of Q2 2023. This poll was conducted three months before the poll that was taken just weeks ago.

It would also be 75 basis points higher than the neutral rate, and more than the 2.25-2.50% peak from the last cycle.

The U.S. stock markets briefly fell into bear territory due to expectations of rate hikes. They are now trading above 3% for only the third time in the last three years. Recession risks have been kept in check.

According to the survey, a median of 40% of Americans expect a U.S. economic recession within the next 2 years. There was a 25% chance that this would happen in the following year.

The forecast for economic growth in 2022 and 2023 was 2.6% and 2.0%, which is a slight downgrade on the survey last month.

As supply chain disruptions and rising costs continue, however, prices are expected to remain high. Consumer Price Index (CPI), inflation, was expected to be 7.4% in 2018 and above the Fed’s target of 2% until at least 2024.

However, these worries were not a concern as the U.S. labor force, which is also targeted by the Fed, did not show any signs of getting worse anytime soon.

It was expected that the unemployment rate would average at 3.6% in this year’s and next years, but will moderately rise to 3.8% by 2024.

The bottom line is there’s no conflict in the Fed having two mandates at this time. The Fed’s task could become more challenging next year, however, if inflation stays’sticky high’ or the unemployment rate increases above 4%.” Harris from BofA added.

(For more stories, see the Reuters economic poll: