Tuesday, 25 January, 2022
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Fed to lift rates in Q3 next year

Fed to lift rates in Q3 next year

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BENGALURU: The US Federal Reserve will raise rates in the third quarter of next year, earlier than expected a month ago, according to economists in a Reuters poll who mostly said the risk was that a hike comes even sooner.

That shift in expectations for lift-off to Q3 from Q4 next year was driven by persistently higher inflation and now brings economists’ views almost in line with market pricing, report agencies.

However, rising Covid-19 cases around the world and the emergence of the Omicron coronavirus variant, along with renewed restrictions in some countries underscore that the pandemic is not yet over.

Still, the Dec 3-8 poll predicted the Fed would raise rates by 25 basis points to 0.25-0.50 per cent in Q3 2022, followed by three more hikes - in Q4 next year and Q1 and Q2 of 2023. The fed funds rate was expected to reach 1.25-1.50 per cent by end-2023. “We currently have September and December rate hikes in our forecast, but if scientific evidence suggests we are not entering a darker period for the pandemic we would imagine three hikes is far more likely,” said James Knightley, chief international economist at ING. The timing shift to the third quarter of next year was also underpinned by Fed Chair Jerome Powell saying the central bank would discuss in December whether to end its US$120 billion in monthly bond purchases a few months sooner than anticipated. Previous expectations were for it to end in mid-2022. More than 60 per cent of respondents to an additional question, 22 of 35, said the programme would end by March. More than 80 per cent of respondents, 30 of 36, said the risk to the timing of the first hike in this cycle was that it comes earlier.

Sixteen said a hike could come in the second quarter of 2022 and five said it could come as early as next quarter. Just a month ago only five economists said the Fed should hike in Q2 next year and four said Q1.

“We are penciling in the first hike in June, but with a risk it happens as early as March. It is a very close call, but we want to wait to see more data, including the impact of Omicron on the economy,” said Ethan Harris, global economist at Bank of America Securities. Economists were split on the biggest downside risk to the US economy next year with 18 of 36 saying new coronavirus variants and 15 choosing high inflation.

Participants in the poll expect the core personal consumption expenditures (PCE) price index, the Fed’s key inflation gauge, to stay above 4 per cent this quarter and next - double the 2 per cent target - before slowing in the second half of 2022 along with growth.