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The Federal Reserve’s aggressive and forceful measures to cool the most overheated economy in four decades could soon come to an end, according to the nation’s top economists.
More than half (or 53%) of experts polled for Bankrate’s first-quarter economic indicators survey say the Fed’s main benchmark interest rate will peak in a target range of 5-5.25%, suggesting that the authorities will probably only raise rates one more time.
But that doesn’t mean that rate cuts are right around the corner. More than four-fifths of economists (or 82%) say authorities are unlikely to start cutting borrowing costs until 2024, even if the recent bankruptcy of the 16th largest bank in the country risks worsening financial stability.
Both estimates are broadly consistent with new projections from officials in March. The Fed has forecast a peak interest rate of 5-5.25% for 2023, after which officials see rates falling to 4.25-4.5% by the end of 2024.
The survey results are notable because they suggest economists still agree with U.S. central bank policymakers at a time when investors are beginning to disclose. Market participants expect the Fed to hike rates one more time before turning around and cutting borrowing costs as early as July, according to CME Group’s FedWatch.
Where do borrowing costs end up? massive implications for consumers. Higher rates mean more expensive mortgages, car loans and credit cards, and they risk hurting jobs and the economy. On the other hand, they make it an even more lucrative time to be a saver – who has already seen the highest savings returns in over a decade thanks to the rapid rise in interest rates.
For individuals and households, this makes an even stronger case for making emergency savings a high priority. Fortunately, returns on savings, including certificates of deposit, are the highest in 15 years.
— Mark Hamrick, Senior Economic Analyst at Bankrate
Key points to remember:
The Fed’s Dilemma: How High Is Inflation Really?
Nearly a fifth (or 18 percent) of economists say the Fed will need to raise interest rates two more times — the second-largest majority among respondents. Meanwhile, nearly one-eighth (or 12%) say the Fed has three more rate hikes. Only 6% say the Fed has already finished raising interest rates.
“The Fed has a hammer, so everything should be treated like a nail,” says Bill Dunkelberg, chief economist at the National Federation of Independent Businesses.
The Fed’s rate path depends on what happens with inflation. Consumer prices have probably already peaked, with inflation falling to 6% in February after hitting 9.1% last June. Yet the price pressures at the start of the year have not eased as quickly as they did just three months ago.
Just 18% of economists said the Fed might cut rates this year, down sharply from 38% in the fourth quarter survey.
Economists forecasting rate cuts point to how much data may be lagging behind what is happening within the US economy. Rent prices, for example, have been rising steadily since the start of 2021, with those costs recently rising 8.8% in February from a year ago. Housing accounted for more than 70% of February’s increase, the report said, even as real-time metrics show prices for new leases are falling. The reason for the delay is intentional: leases only renew once a year, which means they are not immediately reflected in the index.
Recent bank failures could also dampen consumer spending and business investment, as financial institutions offer fewer loans in order to keep enough money to cover their customers’ needs.
All of these factors could cause prices to decelerate rapidly, suggesting the Fed doesn’t have to be so aggressive in keeping rates where they are. more than ten years.
However, inflation currently comes from so-called “stickier” components, i.e. prices that move relatively slowly, according to a Atlanta Fed analysis. The Fed’s preferred way of measuring inflation – based on the Commerce Department’s Personal Consumption Expenditure (PCE) index, which is already lower than the Labor Department’s Consumer Price Index (CPI) – is seen to moderate to 3.3% by the end of 2023.
Fed officials reiterated that they were more worried about pulling back too soon – which would lead to high inflation for longer – than overshooting interest rates and raising borrowing costs too much.
“Inflation is unlikely to hit the Fed’s 2% target in 2023,” said Odeta Kushi, deputy chief economist at First American Financial Corp. at least 2024.”
Hear from the experts
The Fed is unlikely to cut rates until 2024 or later due to the need to assess the lagged impact of previous rate increases. The trade-offs between stabilizing and reducing inflation and mitigating declining economic growth and job losses will become more apparent as markets assimilate rate increases.
— Nayantara Hensel, Chief Economist, Seaborne Defense
2023 [for rate cuts] it’s too early. Even if the economy got very weak quickly, inflation would be too high to allow for a reduction. Markets have been too impatient for the Fed to not hike, stop hikes, cut rates and got it wrong time and time again. Maybe it was betting on banking sector problems erupting and stopping the Fed, or maybe it was just “something in the water”. I consider market prices as special.
— Robert Brusca, Chief Economist at Fact And Opinion Economics
We continue to assume that the Fed will tighten by 25 basis points at the FOMC meetings in May and June, assuming that the worst of the banking sector crisis is behind us, and that the various inflation gauges of year-on-year remain well above 2 percent.
— Mike Englund, Chief Economist at Action Economics
The First Quarter 2022 Bank Rate Economic Indicators Survey of Economists was conducted from March 23-30. Survey requests were emailed to economists across the country, and responses were voluntarily submitted online. Responding were: Odeta Kushi, Deputy Chief Economist, First American Financial Corporation; Yelena Maleyev, Economist, KPMG; Scott Anderson, Chief Economist, Bank of the West; Nayantara Hensel, Ph.D., Chief Economist, Seaborne Defense; Joel L. Naroff, Naroff Economics; Mike Fratantoni, Chief Economist, Mortgage Bankers Association; Robert Frick, Business Economist, Navy Federal Credit Union; John E. Silvia, CEO and Founder, Dynamic Economic Strategy; Dante DeAntonio, director of economic research, Moody’s Analytics; Bernard Markstein, President and Chief Economist, Markstein Advisors; Lawrence Yun, Chief Economist, National Association of Realtors; Robert Brusca, Chief Economist, Fact and Opinion Economics; Bill Dunkelberg, Chief Economist, NFIB; Gregory Daco, Chief Economist, EY; Lindsey Piegza, Ph.D., Chief Economist, Stifel; Eugenio J. Alemán, Ph.D., Chief Economist, Raymond James Financial; and Mike Englund, Chief Economist, Action Economics.