The Russian invasion of Ukraine has sent crude prices surging by about 25%, pushing the average price of regular unleaded gasoline in the United States to near record highs this week with little respite anytime soon.
With the Fed’s benchmark overnight interest rate at near zero and U.S. consumer price inflation rising to the highest level in 40 years, most economists say the Fed needs to act soon.
In testimony to Congress last week, Fed Chairman Jerome Powell made clear that a quarter-point rate hike is likely at the end of the March 15-16 policy meeting. Before Powell’s comments, some investors had expected a possible 50 basis point rate hike by then.
In the March 4-9 survey, all 69 economists saw a 25 basis point rate hike this month, and almost all expected the Fed to continue raising rates at a 25 basis point pace.
But in response to an additional question, 20 of 37 respondents said the risk of raising rates by half a percentage point this year was high, with five saying the risk was very high. As for whether this will happen in the second or third quarter, the two schools of thought are almost evenly divided.
“It’s more important in our view that Powell is open to more than 25 basis points of rate hikes in future meetings,” said Andrew Hollenhorst, chief U.S. economist at Citigroup, who expects the Fed to raise rates in May 50 basis points.
“This seems to suggest that if it weren’t for the geopolitical developments, a decision to raise rates by 50 basis points would likely be at the March 16 meeting.”
The Fed has not raised rates by half a percentage point (50 basis points) at a time since 2000.
Forty-eight of 67 economists surveyed said the federal funds rate is expected to rise to at least 1.25%-1.50% by the end of the year. In response to the economic damage caused by the new crown epidemic, the Federal Reserve has cut interest rates to 0-0.25% in early 2020.
Interest rate futures market forecasts are slightly higher, indicating that the market expects interest rates to rise to 1.50%-1.75% by the end of 2022.
More than a quarter of respondents expect rates to reach at least that level by the end of the year. The highest forecast for year-end interest rates in the survey was 2.00%-2.25%, higher than the previous Reuters poll; the lowest forecast was 0.75%-1.00%.
“We continue to see risks to inflation, the pace of rate hikes later in 2022, and the extreme range of policy rates skewed to the upside,” Citi’s Hollenhorst added.
The year-on-year increase in the consumer price index (CPI) for the quarter is on average forecast at 7.7%, compared with 7.1% in the February survey. The average inflation forecast for this year was raised to 6.1 percent from 5.0 percent forecast in the previous survey, the 10th straight month of upward revisions.
The U.S. labor market is also likely to continue to tighten, with the average forecast for wage growth this year at 5.0 percent, up from 4.9 percent forecast in last month’s survey.
The unemployment rate will fall further from 3.8% to 3.4% by the end of the year, below pre-pandemic levels.
Twenty-eight of 35 economists said the risk of further upward revisions to their medium-term inflation forecasts was high in the coming months, and four said the risk was very high.
Only seven said the risk was low, but all of those economists had previously raised their forecasts.