Fed done hiking rates, but higher for longer message gaining traction

By Prerana Bhat

BENGALURU (Reuters) – The U.S. Federal Reserve will keep its key interest rate on hold on Nov. 1 and may wait longer than previously thought before cutting it, according to economists in a Reuters poll, as the central bank’s higher-for-longer message gains traction.

While a slight majority still see a cut before the middle of 2024, a significant minority of forecasters, around 45%, now see no rate reduction until the second half of next year or later, up from 29% in the last poll.

In the weeks since the Fed’s September meeting where it opted to pause hiking rates, inflation surprised to the upside and payrolls unexpectedly rose by the most in eight months, providing some support for the roughly one-quarter of economists polled who expect another hike.

But financial conditions have also tightened since then, with yields on longer dated Treasury debt rising to multi-year highs. Several Fed officials have indicated that may work as a substitute to further rate rises, while still stressing rates will remain higher for longer.

More than 80% of economists, 90 of 111, in an Oct. 13-18 Reuters poll predicted the Federal Open Market Committee will hold rates in a 5.25%-5.50% range at the conclusion of its Oct. 31-Nov. 1 meeting.

That was in line with market expectations and, if realized, would be the first time in the current cycle that the Fed opted to pause for a second consecutive meeting.

Twenty-six of 111 saw one more rate hike this year, matching the Fed’s median “dot plot” projections from last month. Only one saw two more hikes.

“Though recent upside surprises in September employment and CPI (inflation) suggest greater risk of further rate hikes, our base case remains that the Fed will remain on hold at the current rate…until June of next year,” said Brett Ryan, senior U.S. economist at Deutsche Bank.

“However, if the data continue to outperform, the Fed is likely to resume hiking.”

Expectations for policy could shift following a speech by Fed Chair Jerome Powell to the Economic Club of New York on Thursday.

HIGHER FOR LONGER SINKING IN

While the chances of another rate hike this year are low, so are the odds of policy easing anytime soon, according to the poll.

Over 80% of economists, 91 of 111, had no rate cut in their forecast until at least the second quarter of next year.

Slightly more than half, 61, expect the Fed to start cutting before mid-year. That 55% majority slipped from over 70% in a September poll, extending a trend of rate cut calls being pushed to later. The median expectation for the first cut also shifted to Q3 from Q2.

As recently as July, a majority of economists polled said the Fed would start cutting by end-March.

All but two of 28 respondents to an extra question said the bigger risk was the first rate cut comes later than they expect.

“There will be some point next year where inflation has slowed enough, although it’s not back to target and…the growth situation is deteriorated enough where there’s pressure on Fed officials to do something,” said Lawrence Werther, chief U.S. economist at Daiwa Capital Markets.

“I would not be surprised though, if such a situation came to pass more so in Q3, rather than Q2.”

Inflation was expected to moderate over the coming months but remain sticky, with all inflation measures polled by Reuters – the consumer price index, core CPI, personal consumption expenditures (PCE) and core PCE – above the 2% PCE target until at least 2025.

The world’s No. 1 economy was expected to expand 2.2% this year and 1.0% in 2024 and continue to add hundreds of thousands of jobs over coming quarters. The jobless rate, currently 3.8%, was predicted to pick up slightly to average 4.2% in 2024.

(For other stories from the Reuters global economic poll:)

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