Tonight FED will decide on Interest Rates and it will affect the market immediately. The first hike is now firmly seen coming in March, compared with a June expectation in the December survey. Respondents expect 3.5 rate hikes this year, showing that three are agreed but there is debate over whether there’s a fourth. Half of the 36 respondents see two or three hikes this year, and half see four or five.
An additional three hikes are expected next year. That makes the forecast for a funds rate of just over 1% this year, compared to around zero now, 1.8% in 2023 and a terminal rate, or the end-point of the hiking cycle, at 2.4% reached in March 2024.
“The Fed has pivoted from patient to panicked on inflation in record time,” Diane Swonk, chief economist at Grant Thornton, wrote in response to the survey. “That ups the risk of a misstep in policy, especially in light of the complexity of inflation dynamics today.”
At the central bank’s two-day meeting, which ends Wednesday, it is expected to give more clues as to when it will hike rates and begin shrinking the balance sheet. Chairman Jerome Powell will also address the media.
With an increase in the outlook for Fed tightening and the recent Covid omicron wave, respondents’ economic forecasts have come down. The forecast for GDP fell to 3.5% for this year, down from 3.9% in the December outlook, and 2.7% for 2023, down from 2.9%. The average CPI forecast was raised by about 0.4 percentage points this year to 4.4% and to 3.2% next year.
The unemployment rate is expected to fall to 3.6% this year, compared with the current rate of 3.9%. The chance of recession seen in the next year rose to 23% from 19% but remains about average. Inflation is seen as the No. 1 threat to the expansion, and 51% believe the Fed will have to raise rates above neutral to slow the economy.
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