Fed to raise rates aggressively in coming months, say economists

REUTERS: The Federal Reserve is expected to deliver two back-to-back half-point interest rate hikes in May and June to tackle runaway inflation, according to economists polled by Reuters who also say the probability of a recession next year is 40 percent.

With the unemployment rate near a record low, inflation the highest in four decades and a surge in global commodity prices set to persist, most analysts say the Fed needs to move quickly to keep price pressures under control.

The latest April 4-8 Reuters poll of more than 100 economists forecast two half-point rate rises this year, the first such move since 1994, taking the federal funds rate to 1.25 percent-1.50 percent by the June meeting.
That brings the end-year prediction from the March Reuters poll at least three months forward and more in line with interest rate futures pricing.

A strong majority or 85 of 102 economists, forecast 50 basis points in May and a still-solid majority of 56 said the Fed would follow up with 50 basis points as well in June.

“Given the shift in official commentary and with inflation pressures visible throughout the economy, we believe the Fed will deliver half-point interest rate increases at the May, June and July policy meetings,” said James Knightley, chief international economist at ING.

While the central bank, chaired by Jerome Powell, is likely to gear down to quarter-point moves in the second half of this year, the federal funds rate is now expected to end 2022 at 2.00 percent-2.25 percent, 50 basis points higher than the median forecast in a poll taken last month.

Moving so quickly with interest rates, especially in an economy that has become used to very low borrowing costs for many years, comes with risks.

“With the Fed seemingly feeling the need to ‘catch up’ to regain control of inflation and inflation expectations, a rapid-fire pace of aggressive interest-rate increases heightens the chances of a policy misstep that could be enough to topple the economy into a recession,” added Knightley.