By Indradip Ghosh and Prerana Bhat
BENGALURU (Reuters) – The U.S. Federal Reserve will raise its benchmark overnight interest rate by 25 basis points to the 5.25% to 5.50% range on July 26, according to 106 economists polled by Reuters , with the majority still saying this will be the last increase in the ongoing tightening cycle.
A resilient economy and record-low unemployment well over a year since the Fed launched one of its most aggressive rate-hike campaigns in history has repeatedly unnerved analysts and investors.
Inflation is down, with the headline consumer price index (CPI) slowing to 3.0% in June from 4.0% in May. This has led many Wall Street watchers to conclude that inflation may soon be brought under control, prompting some to renew bets that rate cuts could take place as early as late 2023.
The current debate is whether more rate hikes might be needed to ensure continued “disinflation” or whether doing more might cause unnecessary damage to the economy.
But core inflation remained sticky and Fed Chairman Jerome Powell and other central bank officials said further tightening is ahead, even as they decided to pause hikes. rates at last month’s policy meeting.
The view that rates will stay higher for longer appears to be gaining traction, with the share of respondents surveyed in the July 13-18 period anticipating at least one rate cut by the end of March this year. next year down sharply to 55% from 78% last month.
“For the Fed, despite CPI weakness, we still expect a July hike… (and) while we hope that low inflation will persist, it is politically unwise to bet on that,” said Jan Nevruzi, US Rates Strategist at NatWest Markets.
“We don’t want to rush in and say the fight against inflation has been won, as we have seen in the past.”
Economists and financial market traders still seem slightly out of step with the Fed.
The latest “dot-plot” projections from members of the central bank’s Federal Open Market Committee suggest the benchmark overnight interest rate will peak at 5.50%-5.75%, but only 19 of 106 economists polled by Reuters predict it will reach that rate. range.
Expectations that the Fed is nearing the end of its bull run pushed the dollar to its lowest level in more than a year against major currencies. A weaker greenback will likely make imports more expensive and keep price pressures high.
Indeed, economists are still concerned that inflation is not falling fast enough.
Core inflation, which excludes food and energy prices, will be only slightly lower or remain around the current level of just under 5% by the end of the year, said 20 of 29 respondents to an additional survey question.
The Fed is targeting inflation, as measured by the personal consumption expenditure (PCE) index, for its 2% target. Core PCE was last reported at 3.8% in May.
But none of the inflation indicators polled by Reuters – CPI, core CPI, PCE and core PCE – were expected to hit 2% until 2025 at the earliest.
“While the latest numbers are encouraging, the real battle begins now, as easy base effects are now behind us,” said Doug Porter, chief economist at BMO Capital Markets, referring to the fact that inflation has so much dropped in June, partly because it was so high this time last year.
“As the disinflationary force of lower energy prices fades, that will leave us facing the underlying 4% core trend…(and) to really crack the core, it will likely take a slower slower important to the economy.”
The strong labor market is expected to ease only slightly, pushing the unemployment rate to 4.0% from the current 3.6% by the end of 2023, according to the survey.
A slight majority of economists who answered an additional question, 14 out of 23, said wage inflation would be the stickiest component of core inflation.
Nearly two-thirds of respondents to a separate question, 27 out of 41, expected a US recession in the next year, with 85% saying it would start sometime in 2023.
Still, the economy is expected to grow 1.5% this year, from 1.2% forecast a month ago, then slow to 0.7% next year.
(For more stories from the Reuters Global Economic Survey:)
(Reporting by Indradip Ghosh and Prerana Bhat; Polling by Maneesh Kumar; Editing by Ross Finley and Paul Simao)