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Fed on hold in June, but one-third of economists expect another hike soon

The U.S. Federal Reserve will not raise rates for the first time in well over a year at its June meeting, according to economists polled by Reuters, but a significant minority expects at least one more hike this year as the economy remains resilient.

Fed Chair Jerome Powell signaled in May the central bank might soon pause to assess the impact of an historically-aggressive 500 basis points worth of tightening, having delivered a rate rise at every meeting since March last year.

Over 90% of economists, 78 of 86, polled June 2-7 said the Federal Open Market Committee would hold its federal funds rate at 5.00%-5.25% at the end of its two-day meeting on June 14. The remaining eight expect a 25 basis point rise to 5.25-5.50%.

Since policymakers last met, strong economic data and comments from a few Fed officials have encouraged markets to price in a hike at or before the following meeting in July, with earlier expectations for rate cuts later this year receding quickly.

That hawkish change in market expectations has partly boosted the U.S. dollar towards its highest level since March.

The trouble is inflation has not fallen quickly enough, running at 4.4% on the Fed’s preferred measure and 4.7% when stripped of volatile food and energy prices. It targets inflation at 2%.

“Powell expressed his bias in favor of remaining on hold in June … he’s going to stick with that as it gives them an additional month of data to look at, although I seriously doubt whether that will give them any new insights,” said Philip Marey, senior U.S. strategist at Rabobank.

In the meantime, the job market has remained remarkably strong, with unemployment rising but still well below 4% this late in the tightening cycle and wage inflation falling slowly.

The normally interest-rate sensitive housing market has also withstood higher rates for much longer than many expected, with only minor price falls from a boom during the pandemic.

Over one-third of respondents, 32 of 86, say the Fed will hike at least once more this year, including the eight who say June and 24 who expect a rate rise in July after a pause. Only one predicted a hike in both June and July.

Just over 25% of economists, 23 of 86, forecast at least one rate cut by the end of 2023, but they are dwindling in number, down from 28% in the last poll. Markets are pricing around 60% chance of a rate cut this year.

The latest consumer price inflation data are due one day before the two-day June policy meeting starts, complicating efforts to anticipate the timing of any further rate moves.

“There is not a substantial economic difference between raising policy rates in June or doing so in July. But communicating why rates should not rise in June, despite data to the contrary will be challenging,” said Andrew Hollenhorst, chief U.S. economist at Citi, who expects 25 basis points in June and then another similar move in July.

“If most Fed officials feel at least another 25 basis point hike will be necessary, it seems simplest to deliver that hike in June rather than ‘skip’.”

Fewer than 60% of respondents to an extra question, 28 of 48, said the world’s largest economy would fall into a recession this year, compared to over 70% in a poll just a few weeks ago.

Although the median forecast from the poll has the economy contracting 0.4% and 0.5% in the last two quarters of this year, respectively, that alone would not necessarily mean recession.

The National Bureau of Economic Research – the official arbiter of U.S. recession – also looks at other factors to officially declare a recession, including employment and real income.

Inflation as measured by core PCE was forecast to remain above 2% at least until 2025.

“The longer they don’t hike, the longer the economy is going to continue expanding above trend … the longer you postpone that decision, the harder it is going to be to bring inflation lower,” said Oscar Munoz, U.S. chief macro strategist at TD Securities, who forecasts one more rate hike next week.
Source: Reuters (Reporting by Prerana Bhat and Indradip Ghosh; Polling by Vijayalakshmi Srinivasan and Maneesh Kumar; Editing by Ross Finley and Mark Potter)

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