A survey of economists released on Monday found that respondents expect the Federal Reserve to make modest progress this year in its fight against inflation, even while keeping its benchmark interest rate at a 16-year high.
The National Association for Business Economics’s (NABE) survey included responses from 45 economists. The group forecasts inflation to average 4.2 percent this year, up from a 3.9 percent forecast in the group’s previous survey in February. This is above the Fed’s inflation target of 2 percent.
The persistence of high inflation is likely the main reason economists expect the Fed to keep its key rate at around 5.1 percent, the highest it has been in 16 years.
“Interest rates are expected to decline and inflation is expected to slow in 2024, while job growth is anticipated to moderate, and the unemployment rate to rise,” she added.
The economists expect the U.S. economy to grow 1.2 percent this year, and nearly three-fifths of respondents say the economy will probably fall into a recession over the next 12 months. Most of those who expect a recession expect it to begin this year.
“Most respondents indicate the banking crisis is contained but ongoing, with only about one-fifth believing it will worsen,” NABE Outlook Survey Chairwoman Dana M. Peterson said in a statement.
“A majority of panelists believes breaching the debt ceiling will not bring on a global financial crisis unless an impasse persists for several weeks. Most respondents believe de-dollarization is not a threat over the foreseeable future,” Peterson added.
The findings reflect a survey of economists from businesses, trade associations, and academia.
Fed Chair Jerome Powell on May 19 signaled that the central bank will now likely pause its rate hike campaign. Since March 2022, the Federal Reserve has been raising interest rates from zero percent to a range of 5.0–5.25 percent in an effort to battle elevated inflation. The Fed’s 10 straight rate hikes have led mortgage rates to nearly double, elevated the costs of auto loans, credit card borrowing and business loans and heightened the risk of a recession.
Additionally, companies with less stable finances face the “credit crunch,” an economic situation in which financial institutions tighten up requirements for obtaining a loan, meaning fewer loans are available. The less lending that banks do, the more likely that various firms are to cut back on investment, which in turn slows the growth of employment and the economy overall.
James Knightley, chief international economist at ING, suggested that “with lending conditions rapidly tightening in the wake of recent bank stresses, we think this will mark the peak for interest rates.”
Still, if inflation were to accelerate, the Fed “won’t hesitate to resume hiking interest rates because they’re determined to break inflation’s back,” said Ryan Sweet, chief economist at Oxford Economics. “As such, there is a risk that the pause is temporary.”
The Fed has been facing heavy criticism and warnings by economists not to tighten the money supply any further, which may risk driving the U.S. economy into a deep recession.
Fed officials have indicated that their decision on whether to raise rates at the next Federal Open Market Committee meeting on June 13–14 could come to a close vote.
