Federal Reserve may go easy after 75 basis-point rate hike next week

Federal Reserve Chair Jerome Powell is likely to slow the pace of interest-rate increases after front-loading policy with a second straight 75 basis-point hike next week, economists surveyed by Bloomberg said.

They expect the Federal Open Market Committee to lift rates by a half percentage point in September, then shift to quarter-point hikes at the remaining two meetings of the year. That would lift the upper range of the central bank’s policy target to 3.5 per cent by the end of 2022, the highest level since early 2008.
 

For the September meeting, the survey is slightly more dovish than interest-rate futures in financial markets, which are currently pricing in above a 50 per cent chance of a 75 basis-point increase, assuming a 75 basis-point move next week. But the broader path envisioned by economists is slightly more hawkish than the one implied by market pricing.

It’s also steeper than what was expected prior to the June meeting, when the FOMC forecast rates rising to 3.4 per cent at year’s end and 3.8 per cent in 2023.

Powell has said either 50 or 75 basis points would be on the table at the Fed’s July 26-27 meeting.

The survey of 44 economists conducted from July 15 to 20 forecast the Fed will raise rates by another 25 basis points in early 2023, reaching a peak of 3.75 per cent before pausing and starting to cut rates before the end of the year.

“The still strong labour market and solid consumer spending provide the leeway for the Fed to continue to quickly raise the policy rate,” Oxford Economics chief US economist Kathy Bostjancic said in a survey response.

Most of those surveyed say officials will resort to outright sales of mortgage-backed securities, in line with their stated preference to only hold Treasuries in the longer run.