Latest Poll Shows Fed To Slow Down In September

According to the latest poll of economists, the US Federal Reserve will increase its interest rates by 50 basis points in September amid growing worries of recession and expectations that inflation has hit its peak.

Inflation’s impact

Even though it is still close to a high of four decades, inflation did ease a bit in the previous month, which pushed Fed funds futures to price in an interest rate hike of 50 basis points next month.

There had been a hike of 75 basis points in June as well as July. Most economists believe that September’s meeting would see an interest rate hike of 50 basis points.

This would push up the interest rate to 2.75% and 3%. But, there is a small number that expects the interest rate to be hiked by 75 basis points.

The chairman of the Federal Reserve, Jerome Powell had said in the previous month that it would be appropriate for them to slow down the pace of rate hikes.

Since March, they have hiked the interest rates by 225 basis points and the possibility of a recession has increased with more hikes to come.

A recession

A survey shows that there is a 45% median probability that a recession could hit the economy in the coming year, which is higher than 40% in July.

There is also a 50% chance of a recession happening in the next two years. Market analysts said that a recession is the only way to reach where they want to get, as people don’t want to lose money to higher prices.

They added that the economic recession does not have to be a heavy one because it usually happens when there is a financial crisis. For now, the household balance sheets remain quite strong.

Most economists are also of the opinion that if the US economy is hit by a recession in the next two years, it will not last for long and will not be a very severe one.

Expectations

The expectations that rate hikes will finally slow down have given both bond and equity markets a boost in the past week and have also loosened financial conditions.

This has only put the US Fed under more pressure. A terminal fed funds rate of about 3.50% to 3.75% is expected, which indicates the level at the rates is expected to peak in the current tightening cycle.

Market analysts said that inflation continues to be stubborn and is the single biggest factor threatening the economy.

They also said that they do not expect inflation to go according to plan. If that happens, then the policy rates would have to go even higher and fall between the 4% and 5% range.

If that happens, then there would no longer be a debate about whether a deep downturn can be avoided or not.

The first two quarters of the year had seen the world’s largest economy contract, which defines a technical recession.

But, the strength of non-farm payrolls and a steady unemployment rate indicate otherwise.

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