Experts stick to 5% Fed rate in ’23
Economists largely stuck to previous forecasts that the Federal Reserve will raise interest rates to 5% by March and hold them there for most of 2023, even after inflation slowed last month by more than forecast.
The Federal Open Market Committee is expected to raise rates an additional percentage point over the next several meetings to confront inflation near a 40-year high, according to a Bloomberg survey of 65 economists that took place Nov. 4-11.
The economists kept their view of the Fed’s policy path despite a surge in markets after an unexpectedly large slowdown in price gains in October.
Officials got a bit more good news on Tuesday after Labor Department data showed U.S. producer price growth stepped down in October by more than expected in the latest sign that inflationary pressures are beginning to ease. The producer price index for final demand advanced 8% from a year ago, the smallest annual gain in more than a year, and 0.2% from a month earlier.
Fed officials remain resolute to continue their fight against inflation and not prematurely halt rate hikes in order to ensure a return to the 2% target, even as they acknowledge the economy could suffer pain and a possible recession.
Fed Vice Chairman Lael Brainard said “we have additional work to do” during an event at Bloomberg’s Washington bureau Monday, several hours after Governor Chris Waller said “we’ve still got a ways to go” on rates and pledged to keep them high for a while to dampen price pressures.
The U.S. central bank has raised its benchmark rate from near zero in March to a target range of 3.75% to 4% this month in a bid to slow the economy and bring inflation that surged following the Covid-19 disruptions of 2020 and 2021 under control. The most aggressive tightening campaign since the 1980s has included rate hikes of threequarters of a percentage point at each of the last four policy meetings, triple the usual move.
“The Federal Reserve is focused on defeating inflation, whatever the economic cost,” James Knightley, chief international economist at ING Groep NV, said in a survey response. “We look for Fed funds to peak at 5%, but with nascent signs that inflation will fall sharply next year and the likelihood that recession will bite hard, the chances of a policy reversal in 2023 are high.”
Data released on Thursday showed consumer prices cooling by more than expected in October, with the consumer price index rising 7.7% from a year earlier versus 8.2% the month before.
News of the better-thanexpected CPI report sent bond yields plummeting and saw investors harden bets that the Fed would scale back the size of its next rate increase in December to 50 basis points. Markets are now pricing in a peak near 5% with rates falling to 4.5% by the end of 2023.