A Reuters poll of economists found that most believe the U.S. Federal Reserve will kick off its tightening cycle in March with a 25-basis-point (BPS) interest rate rise. However, a growing minority say it will opt for a more aggressive half-point (50 BPS) move in order to tamp down inflation.
Although inflation is rising around the world, it is particularly high in the United States, hitting a 40-year high last month. That is putting pressure on the Fed to not just raise rates from a record low, but also to reduce its nearly $9 trillion balance sheet, which has become dramatically inflated by emergency bond purchases as the Fed resuscitated the economy from COVID-19 pandemic damage.
Rates were forecast to rise every quarter of 2022 to reach 1.25-1.50% by the end of December—roughly where they were at the start of the pandemic two years ago. One-quarter of poll respondents, 21 of 84, predicted rates would go even higher by the end of the year.
"The risk is that at some point…they'll shift to hiking 50 basis points, because it's very unusual for a central bank to have a zero interest rate in the face of the kind of news we're looking at right now," said Ethan Harris, Head of Global Economics Research at Bank of America Securities, in reference to inflation. "I do think the Fed is behind the curve. In my view, the Fed should have started hiking last fall, and so they've got some catching up to do."
Poll respondents also said this would not be a typical interest rate cycle.
Not only was the rate expected to fall short, but the Fed is only forecast to reach a neutral rate: one which neither stimulates nor puts the brakes on activity.
"Since nobody knows where the neutral rate exactly is, the Fed could get into restrictive territory earlier than it realizes, and that could ultimately lead to a recession," said Philip Marey, Senior U.S. Strategist at Rabobank.
Even so, the Fed is not expected to achieve its target of 2% inflation until at least 2024.
The disruptions to economic activity caused by a surge in COVID-19 cases put a dent in growth in the final months of 2021 and are expected to do so as well this quarter.
For the fourth consecutive month, growth for this quarter was downgraded—to an annualized rate of 1.6%. It was expected to rebound back to 3.8% next quarter and then gradually slow again.
Economic growth was forecast to average 3.7% and 2.5% in 2022 and 2023, respectively, which is largely unchanged from a January poll.
