Survey: Fed to spurn rate pause and stick with quarterly hikes

  • Business
  • Wednesday, 26 Sep 2018

U.S. Federal Reserve will cut interest rates on July 31. - Reuters

WASHINGTON: The Federal Reserve will raise interest rates this week and continue its quarterly drumbeat of 25-basis-point increases straight through to June 2019, according to economists surveyed by Bloomberg.

That’s a steadier pace for hikes over the coming months than Fed watchers anticipated in June, when they predicted the Federal Open Market Committee would skip a move at its December meeting. Such a pause won’t come until next September, economists now say.

In a poll conducted on Sept 18-20, economists expected the upper boundary of the Fed’s target range for the federal funds rate to hit 3% in June 2019 and stay there until the fourth quarter, when they saw a third hike for the year.

That’s a slight step up in pace from the previous survey three months ago when the median estimate was for 2.75% in June. The target range for the policy rate currently is 1.75% to 2%.

“Most folks on the committee have laid out a pretty clear strategy that we need to get to neutral, and probably the sooner the better,” said Stephen Stanley, chief economist at Amherst Pierpont Securities LLC.

Neutral refers to the level at which the Fed’s benchmark rate is neither hitting the economy’s gas pedal nor touching the brakes. Economists estimated neutral at around 3%.

That shift from respondents in their projected rate paths went only so far. Not a single economist predicted a fed funds rate higher than 3% in June next year.

And from there, they predicted just one more hike before it peaks at 3.25% in the fourth quarter of 2019.

The responses signal confidence that, in the near term, firming inflation, the tightening US labour market, and stimulus provided by tax cuts and higher government spending will outweighing concerns among Fed officials over an escalating trade war with China and emerging market stresses.

Economists continued to expect, however, that Fed officials will forecast a slowdown for the economy in 2020. They expect the Fed’s median estimates for growth to be 2.9% in 2018 and 2.5% in 2019, before dropping to 2% in 2020. — Bloomberg

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