BENGALURU, March 17 (Reuters) – The U.S. Federal Reserve will raise interest rates by 25 basis points on March 22 despite recent turmoil in the banking sector, according to a strong majority of economists polled by Reuters, who were divided on the risks in their view of terminal interest rates.
Market prices for the upcoming meeting have been on a rollercoaster ride, switching from expecting a 50 basis point move after Fed Chairman Jerome Powell’s testimony last week to a pause at one point after the failure of some regional banks.
Two-year U.S. Treasury yields, which typically reflect expectations for near-term interest rates, fell more than 80 basis points this week after the collapse of Silicon Valley Bank, the biggest bank collapse since the 2008 financial crisis.
But Reuters poll predictions for the March meeting ultimately held steady from last month, with 76 of 82 economists predicting a quarter-point increase in line with interest rate futures, bringing the federal funds rate to 4.75%-5.00%.
That would come after the European Central Bank’s decision on Thursday to follow through with a 50 basis point hike it previously announced in February, prioritizing sticky inflation.
Only five respondents in the latest Fed poll expected a break, including four primary dealers, with only one bank, Nomura, expecting a 25 basis point cut.
“Last week’s financial turmoil will give the Fed some qualms about pushing interest rates much higher,” said Bill Adams, chief economist at Comerica Bank. “But Fed policymakers have reiterated many times that they are more concerned about raising rates too little than raising them too much.”
“A break in March is possible, but they are more likely to wander and risk erring on the side of too much restraint.”
While some respondents were hesitant to give a rate outlook beyond March, 56 of 64 economists said there would be at least another 25 basis point hike in the second quarter, bringing the Fed Funds rate to a peak of 5.00% -5.25%, in line with the previous vote.
Respondents to a further question were almost split on the risks to their terminal rate forecast, with a slight majority, 12 out of 23, saying the peak rate could be lower than they expect.
Substantial majorities in previous polls said risks were skewed toward a higher terminal rate.
“We see significant uncertainty about the Fed’s path in March and beyond,” said David Mericle, chief U.S. economist at Goldman Sachs, one of the few who expect a pause in March. “It’s hard to be overconfident at this point.”
However, Mericle expects more increases with a top rate of 5.25%-5.50% in Q3, higher than the poll’s median.
The survey found a median 65% probability of a US recession in the next two years and forecast growth of just 1.0% this year and next.
Most economists still say the Federal Open Market Committee will maintain its “higher for longer” mantra and keep prices on hold for the rest of this year at least.
Only eight out of 63 respondents with a view at the end of 2023 had a cut in their forecast, in line with market expectations.
Inflation, still running well above twice the Fed’s 2% mandate, will remain above target at least until 2025, the poll showed. Meanwhile, the labor market is showing few signs of weakness, with unemployment forecasts broadly lower compared to last month’s poll.
“If the FOMC now abandons its mission to eradicate inflation from the system, it will lose credibility as an inflation fighter and long-term inflation expectations will likely become unmoored,” said Philip Marey, senior US strategist at Rabobank.
(Other stories from Reuters Global Economic Poll)
Reporting by Prerana Bhat and Indradip Ghosh; Voting by Anitta Sunil, Sarupya Ganguly and Mumal Rathore; Editing by Ross Finley and Jan Harvey
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