The Fed will deliver two 25-basis-point increases in the first quarter, followed by a longer pause

BENGALURU, Jan 20 (Reuters) – The US Federal Reserve will end its tightening cycle after hiking 25 basis points at each of its next two policy meetings and then likely keep interest rates steady for at least the rest of the year. Is. to most economists in a Reuters poll.

Fed officials broadly agree that the US central bank should slow the pace of tightening to assess the impact of rate hikes. The Fed last year raised its benchmark overnight interest rate by 425 basis points, with drastic reductions in 75- and 50-basis-point moves.

As inflation continues to decline, more than 80% of forecasters in the latest Reuters poll, 68 out of 83, predicted the Fed would decline a 25-basis-point hike at its Jan. 31-Feb. 1 meeting. If realized, this would take the policy rate – the federal funds rate – into the range of 4.50%-4.75%.

The remaining 15 saw 50-basis-point increases in two weeks, but only one of those was from a US primary dealer bank that directly deals with the Fed.

The fed funds rate was expected to reach 4.75%-5.00% in March, according to 61 of 90 economists. This matched interest rate futures pricing, but was 25 basis points below the median point for 2023 in “dot plot” projections released by Fed policymakers at the end of their December 13-14 meeting.

James Knightley, chief international economist at ING, said: “US inflation suggests that price pressures are easing, yet in a strong jobs market environment, the Federal Reserve will be wary of making a call to top interest rates. “

The expected terminal rate will be more than double the peak of the last tightening cycle and the highest since mid-2007, just before the global financial crisis. There was no clear consensus on where the Fed’s policy rate would be headed in late 2023, but nearly two-thirds of respondents forecast 4.75%-5.00% or higher.

The interest rate view in the survey lagged slightly behind the Fed’s recent projections, but polled averages for growth, inflation and unemployment were largely in line.

Inflation was predicted to fall further but remain above the Fed’s 2% target for years to come, leaving relatively little room for a rate cut.

In response to an additional question, more than 60% of respondents, 55 of 89, said the Fed is more likely to hold rates steady for the rest of the year than cut them. That view is in line with the survey’s median projection for the first cut coming in early 2024.

However, a significant minority, 34, said a rate cut was more likely this year, with 16 citing a decline in inflation as the biggest reason. Twelve said an economic downturn and four said a sharp rise in unemployment.

“The Fed has prioritized inflation over employment, so only a sharp decline in core inflation could persuade the FOMC (Federal Open Market Committee) to cut rates,” said Philip Mare, senior US strategist at Rabobank.

“While the peak in inflation is behind us, the underlying trend remains persistent … We do not expect inflation to be near 2% before the end of the year.”

Reuters Poll – US Federal Reserve Outlook

Meanwhile, the Fed is unlikely to do much to help push the economy into recession. The poll showed a nearly 60% chance of a US recession within two years.

While this was down from previous polling, many contributors did not specify recession prospects for their forecasts as recession was now their base case, although several previous Reuters polls had predicted that.

The world’s largest economy was expected to grow by just 0.5% this year before rising to 1.3% in 2024, still below the long-term average of about 2%.

With mass layoffs, especially at financial and technology companies, the unemployment rate was expected to rise to an average of 4.3% next year, up from the current 3.5%, and then climb again to 4.8% the following year.

While still historically low compared to previous recessions, forecasts were about 1 percentage point higher than a year earlier.

(For other stories from the Reuters Global Economic Survey:)

Reporting by Prerna Bhat; Polling by Milouni Purohit; Editing by Ross Finley and Paul Simao

Our Standards: The Thomson Reuters Trust Principles.

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