In a recent poll of scholarly economists, it was predicted that the United States Federal Reserve is likely to reduce interest rates only once in the current year. This comes as ongoing inflation necessitates an adjustment in the central bank’s planning for further reduction in borrowing expenses.
Over half of the 39 participating academics in the FT-Chicago Booth poll proposed that the Fed would execute a single quarter-point cut this year, whilst some predicted no cuts at all. This forecast was made ahead of the Federal Reserve’s Wednesday meeting, with speculations suggesting they will decrease their own slash predictions from three to two or potentially less this year.
Due to ongoing inflation, interest rates are anticipated to remain at a higher level for an extended period of time. These projections are in line with recent consumer price index data, set to be released by the US Bureau of Labor Statistics on Wednesday, prior to the Fed’s rate declaration.
The nation’s economic state could pose a challenge for President Joe Biden through the US election in November, as he grapples with disapproval ratings on his economic approach and public concerns over increased living costs.
The polled economists raised their predictions for consumer price expenditures (CPE) inflation; from 2.5 percent in March to the increased figure of 2.8 percent. The Fed has set a CPE target of 2 percent, but reported CPE was 2.7 percent in April as per the late May statement by the Bureau of Economic Analysis.
Harvard University professor and poll participant, Karen Dynan, has voiced concerns over current data indicating that inflation higher than the set target could be becoming a longer-term issue.
The Federal Reserve officials maintain that the robust job market allows them the flexibility to uphold interest rates at a 23-year high of 5.25-5.5 percent, unlike their counterparts in the Eurozone and Canada; both choosing to reduce rates last week.
Economists’ confidence in a gentle landing for the American economy has seen an increase, with the poll illustrating that 52 percent of respondents do not anticipate a recession until 2026 or even later; marking an increase from the 46 percent recorded in March.
A significant portion of survey participants, in fact, the majority, believes that the Federal Reserve will likely execute its initial cut of the year in September, perfectly timed before the election on the 5th of November. Professor Julie Smith of Lafayette College has forecasted the probability of another cut in line after the US elections. However, she has also mentioned the high complexity involved in implementing Fed rates during the autumn primarily due to the potential interconnections with the US election politics and the presidential elections.
Despite the widespread expectations that the central bank will hold the rates steady this week, experts are predicting that the Federal Open Market Committee’s renowned “dot plot” will present a decrease in the count of cuts foreseen by policymakers this year. Claudia Sahm, formerly part of the Fed staff and currently the head economist at New Century Advisors, suggested that an underwhelming Consumer Price Index (CPI) outcome for May might prompt authorities to step down from three cuts to just one. Sahm stressed on the Fed’s preference to avoid sudden shifts unless absolutely requisite, while demonstrating adaptation to data, even though she wasn’t among those surveyed.
The Financial Times-Chicago Booth survey, conducted through the assistance of the university’s Kent A Clark Centre for Global Markets, also accentuated economists’ apprehensions regarding the outstandingly growing fiscal debt in the US. In May, The Congressional Budget Office (CBO), an official overseer of US expenditure, claimed that it expects the federal debt to represent 166% of the GDP by 2054. More than half of the polled, reaffirmed the credibility of the CBO’s estimated debt, whereas more than a quarter concluded it being underestimated.
Dynan voiced concerns regarding the potential risk with the prospect of geopolitical events and the demands to tackle climate change issues, contributing to more pressure. – Copyright The Financial Times Limited 2024.