Academic economists participating in a Financial Times poll predict that the Federal Reserve will be compelled to retain higher interest rates longer than anticipated by marketplace participants and decision-makers at the central bank. Over two-thirds of the participants in the FT-Chicago Booth poll predict that the Fed will implement two or fewer rate reductions this year, suggesting a challenging end to its anti-inflation campaign. The consensus for the initial rate cut was divided between July and September, a delay compared to financial market expectations of a rate cut as early as June or July.
This implies that investors may have to rethink their expectations for further monetary easing from the Fed, with it likely to sustain rates at the ongoing 23-year peak of 5.25 to 5.5 % this week. Jason Furman, a Harvard University economist who participated in the survey, said the data would make it tougher for the Fed to lower rates. The unwillingness of inflation to abate would then disappoint the Biden administration, which is eager for a return to pre-pandemic borrowing costs.
In a bid to alleviate the burden on potential homeowners, President Biden proposed tax credits during his recent State of the Union address. However, this measure is less likely to make a significant impact compared to a decrease in borrowing costs. On the subject, Vincent Reinhart, former Fed official and current chief economist at Dreyfus and Mellon, suggests the political timeline may sway the decision-making of the rate-setters. The ideal timing for rate cuts, according to Reinhart, who did not participate in the poll, is expected to be September, but political considerations could prompt action already in June. Notably, some rate-setters like Raphael Bostic, president of Atlanta Fed, have previously expressed their preference for fewer rate moves than the anticipated three.
Data from the previous week has revealed a rise in inflation higher than anticipated as measured by both the consumer price index (CPI) and producer price index (PPI). The inflation rate for CPI in February increased marginally from 3.1% to 3.2%, and the PPI saw a spike from 1% to 1.6%, indicating that the majority of the post-pandemic reduction in commodity costs has been accounted for.
Evi Pappa, an expert at Carlos III University in Madrid, advises caution, suggesting that central bankers hold off immediate intervention. Instead, they should wait until observable data indicates inflation nearing the target rate of 2% before making decisive moves, rather than basing actions on projected figures.
Additional data points towards a stronger jobs market and economic growth, fostering growing confidence among participants that the US economy is on track for a soft landing. The term refers to the Federal Reserve’s ability to hit its 2% inflation target without triggering a significant hike in unemployment. The recent poll shows a decline in the number of respondents predicting a recession before 2026.
“American economic activity remains quite vigorous,” Brandeis University professor Stephen Cecchetti comments. Although he acknowledges some risk of deceleration in the year’s latter half, it is less than what he had anticipated three months ago.
The positive upward economic growth could impact the Federal Reserve’s desire for lowering rates, according to some participants. Hilde Bjørnland, an economics professor from BI Norwegian Business School, recognises US demand being stronger than in European countries and speculates the initial rate reduction may occur only by November.