Majority of Academic Economists Poll Predicts Tougher Action from US Federal Reserve to Combat Inflation
According to a recent poll by Financial Times and the Kent A Clark Center for Global Markets at the University of Chicago Booth School of Business, leading academic economists believe that the US Federal Reserve will need to take tougher-than-expected action to combat inflation, with at least two more quarter-point interest rate hikes predicted for this year. The investigation surveyed 42 economists between June 5th and June 7th, revealing that 67% expect the federal funds rate to peak between 5.5% and 6% this year, up 49% from the previous survey conducted just days after a series of bank failures in March. Amongst those polled, worries about inflation outweighed concerns about the banking sector, with a median estimate of the personal consumption expenditure price index (excluding food and energy costs) rising by 0.2 percentage points, reaching 4% at the end of the year.
Fed Officials Prefer to Forego Rate Hike at Next Meeting Despite Growing Expectations
Officials from the US Federal Reserve are indicating that they would prefer to skip a rate hike at their next two-day meeting on Tuesday, despite growing expectations that the Fed is not done with its tightening campaign. Senior officials are keeping the door open for further tightening whilst monitoring economic resilience and observing any effects from regional lender pullbacks from the collapse of Silicon Valley Bank, First Republic and other institutions.
Forecast for No Cuts Until 2024 Whilst Unemployment Levels Expected to Remain Stable
No cuts beyond the two predicted for this year are expected until 2024, with most economists expecting the first in the second quarter or later. However, most economists do not foresee an impending significant increase in the unemployment rate, with a median estimate of 4.1% for the end of the year, just slightly higher than its current level of 3.7%. Calls for recession have also been pushed back, with most economists not expecting the National Bureau of Economic Research to declare one until 2024. Of those polled, around 70% said the peak unemployment rate in a future recession would not be reached until the third quarter of 2024 or later.
Economists Believe Fed Will Need to Raise Federal Funds Rate to 6% to Combat Inflation
Regarding the inflation rate, economists believe that rising unemployment and falling wage gains, followed by global headwinds resulting from the weakening Chinese economy and the strength of the US dollar will be the main factors for lowering it. However, most economists do not expect an imminent large increase in the unemployment rate or an impending recession. Most believe that the Fed will need to raise the federal funds rate to at least 6% to combat inflation, a view shared by 12% of those surveyed.
Additional Piece: Inflation in the Post-Pandemic Economy
While the COVID-19 pandemic has disrupted many aspects of the global economy, it has also had an enormous impact on the inflation rate. Many countries worldwide have experienced inflationary pressures in the past year and a half, which have led to increasing concerns about the long-term economic impact of high inflation rates.
One of the key drivers of inflation in the post-pandemic economy has been the supply chain disruptions caused by the pandemic. As many countries around the world shut down their borders and limited travel, shipping routes were disrupted, and supply chains were interrupted. This led to shortages in many industries, and as demand continued to rise, prices increased.
At the same time, central banks around the world, including the US Federal Reserve, have maintained low-interest rates to stimulate economic growth during the pandemic. While this approach was necessary to prevent complete economic collapse, it has also led to an increase in inflation rates as low-interest rates create artificially low borrowing costs, which in turn increases demand and contributes to price growth.
Looking ahead, it is clear that the post-pandemic economy will face continuing inflationary pressures as countries work to rebuild their economies. While central banks like the Fed will continue to monitor inflation closely and implement policies to combat it, it is important to note that there is no easy solution to this problem. Ultimately, higher prices may be the new normal in the post-pandemic world, and businesses and individuals will need to adjust their expectations accordingly to remain competitive and financially stable.
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The U.S. Federal Reserve will need to take tougher-than-expected action to stamp out inflation, according to a majority of leading academic economists polled by the Financial Times, who forecast at least two more quarter-point interest rate hikes This year.
The last investigationconducted in partnership with the Kent A Clark Center for Global Markets at the University of Chicago Booth School of Business, predicts that the Fed will raise its key rate to at least 5.5% this year. fed fund futures suggest traders only favor a quarter-point rate hike more in July.
Senior Fed officials have indicated they prefer to forgo a rate hike at their next two-day meeting on Tuesday, while keeping the door open for further tightening. After 10 consecutive increases since March 2022, the federal funds rate is now hovering between 5% and 5.25%, the highest level since mid-2007.
Of the 42 economists surveyed between June 5 and June 7, 67% expect the federal funds rate to peak between 5.5% and 6% this year. That’s up 49 percent in the previous surveywhich ran just days after a series of bank failures in March.
More than half of respondents said the peak rate would be reached in the third quarter or earlier, while just over a third expect it to be reached in the last three months of the year. No cuts are expected until 2024, with most expecting the first in the second quarter or later.
“They haven’t done enough in long enough to get inflation low,” said Dean Croushore, who served as an economist at the Fed’s Reserve Bank of Philadelphia for 14 years. “They are on the right track, but the road is going to be longer and more tortuous than they ever thought.”
Despite growing expectations that the Fed is not yet done with its tightening campaign, most economists thought the Fed would skip a decision in June. Additionally, nearly 70% said this would be the right move as it was not yet clear whether the policy rate was high enough to bring inflation down and officials could also resume increases if necessary.
“The economy has proven to be much more resilient than we initially thought and the question is: is this resilience temporary and are the planned hikes sufficient or does the Fed need more even more upside? The Fed is pausing to see if it can better understand which of these two questions is correct,” said Jonathan Parker of the Sloan School of Management at the Massachusetts Institute of Technology. the Fed will make at least two more quarter-point rate hikes.
A further complication is the pullback of regional lenders following the collapse of Silicon Valley Bank, the First Republic and a handful of other institutions. Arvind Krishnamurthy of the Stanford Graduate School of Business said the economic effects are highly uncertain but it is clear that a credit crunch is underway, suggesting the Fed may not need to. do the same in terms of further rate hikes to achieve the same inflation outcome.
Among respondents, however, worries about inflation seemed to outweigh worries about the banking sector. Compared to March, the median estimate of the personal consumption expenditure price index excluding food and energy costs – the Fed’s preferred inflation gauge – rose by 0, 2 percentage points to reach 4% at the end of the year. In April, it recorded an annual rate of 4.7%, well above the Fed’s 2% target.
By the end of 2024, about a third of respondents said it was “somewhat” or “very” likely that baseline PCE would exceed 3%. More than 40% said it was “about as likely as not”.
“There has been virtually no progress on core inflation, the real economy is performing much better than anyone could have expected and policymakers have yet to fully adjust to this reality,” said Jason Furman, who was previously Obama’s economic adviser. administration. He believes the central bank will need to raise the federal funds rate to at least 6%, a view shared by 12% of those polled.
According to 48% of economists, the main factors for lowering the inflation rate will be rising unemployment and falling wage gains, followed by global headwinds resulting from the weakening Chinese economy and the strength of the US dollar. . However, most economists do not expect a large and imminent increase in the unemployment rate. The median estimate for the end of the year is 4.1%, slightly higher than its current level of 3.7%.
Calls for recession have also been pushed back. Most economists don’t see the National Bureau of Economic Research declaring one until 2024, compared to surveys last year in which about 80% expected a recession in 2023.
About 70% said the peak unemployment rate in a future recession would not be reached until the third quarter of 2024 or later. Gabriel Chodorow-Reich of Harvard University said he was bracing for a mild recession in which unemployment would hit around 6%.
https://www.ft.com/content/d5dcc72e-96eb-403a-a793-c9a8c3a11e30
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