According to the results of Reuters’ survey of 106 economists, on July 26, the US Federal Reserve (Fed) will raise the benchmark interest rate by 25 basis points to the 5.25-5.50% range.
The survey results are also in line with FedWatch data, which is compiled by the CME Group according to the information compiled from the pricing behavior of market actors. According to the CME, the market sees the probability of a 25 basis point rate hike by the Fed as almost certain at 99.8 percent.
However, most economists think this increase will be the last of the current tightening cycle and interest rate hikes will come to an end.
Economists baffled by resilient US economy
Economists and investors are baffled about the resilient U.S. economy, as the Federal Reserve has drastically increased interest rates to combat rising inflation in the COVID-era money and Russia-Ukraine war. While the labor market, which has managed to stay tight despite the interest rate hikes, triggers fears that inflation will be sticky in the markets, some economists think that the tight labor market makes room for the US economy to get rid of inflation before a major contraction.
In general, the current debate in the markets seems to be focused on whether the rate hikes are sufficient according to the current economic outlook. Despite the decline in headline inflation, the solid outlook in core inflation brought the interest rates to the agenda again, which was left fixed at the last meeting in the USA, while Powell and most Fed members believe that these increases are necessary. Already, in his speeches, Powell directed the market that 2 more interest rate hikes could take place. Still, economists think that 2 rate hikes will not happen and the Fed will end the increase cycle by increasing rates by 25 basis points at its July 26 meeting. A common view, especially among economists, is that a tougher rate hike, other than 25 basis points, will cause a collapse in the resilient US economy, which points to the 25 basis points Powell’s interest rate hikes in two meetings in a row.
However, investors and economists are no longer on the optimistic side. According to recent polls, economists are beginning to see the likelihood of a Fed rate cut as low by the end of March next year. According to the results of the survey, while 77 percent of the participating economists predicted an interest rate cut until the mentioned date, 55 percent now make this prediction.
“For the Fed, we anticipate a rate hike in July despite soft core inflation data… Although we hope inflation will remain soft, it is not wise to make policy based on this situation,” said Jan Nevruzi, US Rate Strategist at NatWest Markets.
The expectation that the Fed is nearing the end of its tightening cycle has pushed the dollar to a one-year low against other major currencies. The fact that the weak dollar makes imports expensive and causes price pressures to remain high is one of the possible scenarios discussed in the markets.
According to the answer of economists to another question asked by Reuters, 27 out of 41 economists expect a recession in the USA within the next year, and 85 percent of them think that the recession will begin before the end of 2023. However, the survey expects the US economy to grow by 1.5 percent this year and contract by 0.7 percent next year. The previous forecast of economists was that the US economy would grow 1.2 percent this year.
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