According to economists polled by Reuters, the United States Federal Reserve (Fed) will increase interest rates by a total of 25 basis points (bps) in May and then leave them unchanged for the rest of 2023. The survey also indicated that a brief and weak recession this year was expected.
Markets have been supported by the price of at least a 25-bps decrease by the end of 2023 due to worries about the banking sector’s stress and an economic downturn, both of which the Fed highlighted during its policy meeting on March 21–22.
However, considering inflation that is now running well over the Fed’s 2 percent objective, persistent strength in the labour market, and a dramatic reduction in banking sector stress over the past several weeks, a rate decrease appears more unlikely than higher rates.
US two-year Treasury yields generally reflect expectations for short-term interest rates, which have increased by about 75 basis points over the past month. The likelihood of rate reduction has decreased due to continued good economic indicators.
In the most recent Reuters poll, 94 out of 105 economists predicted that the US central bank would increase its primary policy rate by 25 basis points to the 5 percent–5.25 percent range at a meeting on May 2-3, in line with the market expectations.
St. Louis Fed President James Bullard claimed a significantly higher peak policy rate than expected earlier this week in an exclusive interview with Reuters since inflation is still persistently high
According to 26 out of 35 respondents, the biggest danger to inflation this year was that it might be greater than expected. Inflation was not predicted to reach the central bank’s objective until at least 2025.
It was predicted that the unemployment rate would increase from its current level of 3.5 percent to 4.3 percent by the end of 2023 and an average of 4.5 percent in 2024, still exceptionally low relative to other recessions, maintaining upward pressure on sticky price increases.
Andrew Hollenhorst, the chief US economist at Citi, stated that the Fed is likely to raise interest rates not only in May but also in June and July if the labour market continues to be robust and inflation remains persistent, as it does in our projections.
Although there are two sides to every risk, we continue to forecast a terminal policy range of 5.50 percent to 5.75 percent.
A recession may make it more difficult for the Fed to raise rates much, especially since the economy hasn’t yet benefited significantly from earlier rate increases.
Responding to a second question, 37 out of 47 respondents predicted a US recession in 2023, 31 of whom said it would be brief and shallow. Four said it would be lengthy and shallow.
According to the survey, the likelihood of a US recession in the next two years is currently 70 percent, up from 65 percent last month. Forecast growth for 2019 and 2024 is only 1 and 8 percent, respectively.