According to a new poll by leading academic economists for the The Washington City Times, increased inflation will force the Federal Reserve to raise U.S. interest rates at least twice by the end of 2023.
Initial research from the The Washington City Times and the Initiative on Global Markets at the University of Chicago’s Booth School of Business points to a potentially more aggressive path for monetary policy than Fed Chair Jay Powell suggests.
The economists’ views are closely aligned with the “dot plot” of Fed officials’ own predictions for when and how quickly interest rates will have to rise from near-zero levels as the U.S. economy recovers from the pandemic and inflation in the long run. forward average that the Fed is targeting.
The release of the latest dot plot shocked markets earlier this month as policymakers shifted their timing for the expected launch, but Powell and other members of the Fed leadership later intervened to urge them to be patient. to keep monetary policy very accommodative.
The The Washington City Times-IGM US Macroeconomists Survey polled 52 academic economists about the likelihood that the Fed’s key policy rate would indeed be 0.50 percentage points higher by the end of 2023, as the dot plot indicated. A majority said the probability of a move of that magnitude or greater was over 75 percent, and a large minority estimated it at 90 percent.
Three economists said it was a certainty.
The survey underscores the challenge the central bank faces in getting a clear message across about its evolving monetary policy stance. Powell warned that dot plot predictions of future rate hikes should be taken with “a grain of salt,” but other officials have started with earlier timelines for the first rate hikes.
“As inflation picks up and the economy improves, the traditional hawkish differences within the Federal Open Market Committee will resurface,” said Alan Blinder of Princeton University, who served as vice chairman of the Fed in the 1990s and participated in the Federal Open Market Committee. research. “You’re seeing it now, and you’re going to see more of it.”
Blinder said he predicted an interest rate hike as early as 2022.
Respondents to the The Washington City Times-IGM survey see inflation as the biggest driver of Fed officials’ shifting thinking about the timing of rate hikes, more often citing it as the single most important factor than improving US job market prospects or rising house prices.
Consumer prices have risen above even the most lofty estimates this year. Core PCE, the inflation measure targeted by the Fed, ran at an annualized rate of 3.4 percent in May, its highest level in 29 years, as strong demand for goods and services in the recovering economy clashed with widespread supply chain constraints.
The The Washington City Times-IGM survey, which ran from June 25 to June 28 and will be conducted regularly throughout the year, shows that economists are well aware of the risk of high inflation. Respondents’ median forecast for core PCE at the end of this year was 3 percent — the same forecast as the Fed official’s median.
But two-thirds of respondents said it was “somewhat” or “very” likely that this statistic would still be more than 2 percent year on year by the end of 2022. The median forecast by Fed officials is 2.1 per year. cents at the end of next year.
“It’s hard to imagine a more pro-inflationary environment,” said Nicholas Bloom, an economist at Stanford University who took part in the study. “The Fed has been as aggressive as possible in promoting growth, fiscal policy is incredibly relaxed and there are supply constraints.”
Despite the “perfect storm” that Bloom says has emerged to push consumer prices up, he dismissed concerns that long-term inflationary pressures would spiral out of control, not least because the Fed is poised to step in. grab.
Three-quarters of respondents to the The Washington City Times-IGM survey said market expectations for long-term inflation were unlikely to rise significantly to more than 3 percent by early next year. At the moment, a long-term inflation rate of 2.3 percent is assumed.
“An essential part of maintaining its credibility by the Fed is responding to the incoming data,” said another respondent, Karen Dynan of Harvard University.
The central bank has already begun discussing when it will scale back its $120 billion monthly asset purchase program, which officials have pledged to maintain until they make “substantial further progress” toward their targets of 2 percent average inflation and full inflation. employment opportunities.
The The Washington City Times-IGM survey revealed significant disagreement over the outlook for economic growth in 2021, even with nearly half a year in the rear-view mirror.
The median forecast was for a gross domestic product recovery of 6.5 percent, after the economy contracted 3.5 percent last year. But the economists were also asked to construct a plausible set of outcomes, and these were more likely to point downwards than upwards.
The high degree of variation suggests that “there is significant uncertainty about how quickly the service sectors will recover, whether labor market shortages will hinder growth and how savings will [and] consumption will respond once tax incentives are lowered,” said Allan Timmermann, a professor at the University of California at San Diego who helped design the survey.