Economists Say the US Federal Reserve Will Only Cut Interest Rates Once This Year - Latest Global News

Economists Say the US Federal Reserve Will Only Cut Interest Rates Once This Year

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The Federal Reserve will cut its benchmark interest rate only once this year, according to a new survey of economists, as persistent inflation forces the central bank to adjust its timetable for cutting borrowing costs.

More than half of the 39 academics who responded to the FT-Chicago Booth poll said the Fed would cut interest rates by just a quarter of a percentage point this year. Almost a quarter predicted no rate cuts at all.

The results of the survey, conducted in the last week of May, will be presented at the Fed meeting on Wednesday, when rate-setters are expected to cut their forecasts for rate cuts this year from three to two or fewer.

Expectations that interest rates will stay higher for longer follow months of stronger-than-expected inflation. The U.S. Bureau of Labor Statistics will release its consumer price index data for May on Wednesday, just hours before the Fed’s rate announcement.

If borrowing costs remain high until the U.S. election in November, it would be a major blow to President Joe Biden, who is struggling with low approval ratings because of his handling of the economy, with voters concerned about the cost of mortgages, food and other goods.

Economists participating in the survey also raised their forecasts for consumer price inflation – another indicator of price increases – from 2.5 percent in the March survey to 2.8 percent. The Fed is targeting a CPE of 2 percent. The overall CPE figure was 2.7 percent in April, the Bureau of Economic Analysis said in late May.

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Karen Dynan, a professor at Harvard University and a survey respondent, said the recent data had “raised concerns about whether above-target inflation is becoming entrenched.”

Fed officials are convinced that the continued strength of the labor market gives them room to keep interest rates at the 23-year high of 5.25 to 5.5 percent. In contrast, the central banks of the eurozone and Canada cut their interest rates last week.

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Economists’ expectations of a soft landing for the US economy have also increased. The survey shows that 52 percent of respondents do not expect a recession until 2026 or later, up from 46 percent in March.

A third of survey respondents – the largest group – believe the Fed will make its first rate cut this year in September, at the central bank’s last meeting before the Nov. 5 election.

Julie Smith, a professor at Lafayette College, said a September move was likely “and perhaps another later in the year after the US election.”

However, she said Fed interest rate changes in the fall would be “very delicate” because they would “interact with U.S. politics and the presidential election.”

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While the central bank will almost certainly leave interest rates unchanged this week, Fed watchers expect the Federal Open Market Committee’s so-called “dot plot” to show a decline in the number of rate cuts central bankers can expect this year.

Claudia Sahm, a former Fed official and now chief economist at investment manager New Century Advisors, said a disappointing consumer price index (CPI) for May could prompt officials to shift from three to one.

“The Fed doesn’t like to react abruptly unless it’s absolutely necessary,” said Sahm, who did not participate in a survey.[But] They want to show that they are responding to data.”

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The FT-Chicago Booth poll, conducted by the university’s Kent A. Clark Center for Global Markets, also highlighted economists’ concerns about rising U.S. national debt.

The Congressional Budget Office, an official U.S. spending watchdog, said in May that national debt is expected to reach 166 percent of GDP by 2054.

More than half of the survey respondents said the CBO’s debt estimate was credible, but more than a quarter said it was too low.

“Given potential geopolitical events and the need to respond to climate change, there is a risk of even greater upward pressure,” Dynan said.

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