The Federal Reserve will bring the current cycle of interest-rate increases to an end after one more hike later this year, according to a new Bloomberg survey of economists. The median of responses in the March 13-15 poll predicted one hike in September, compared with two 2019 increases forecast in the December survey. They also said that would likely mark the peak of this hiking cycle, with the upper end of the target range for the benchmark rate touching 2.75%. Just three months ago they saw that peak at 3.25%. None of the 32 respondents anticipated a rate move when the Federal Open Market Committee gathers in Washington March 19-20. Fed officials have repeatedly signaled they are content to leave rates unchanged this month and perhaps well into 2019.
“The Fed appears to be on hold for the foreseeable future,” said Scott Brown, chief economist at Raymond James Financial. “Economic growth is expected to moderate this year, but risks are weighted to the downside.” Investors continue to be even more sceptical over the likelihood of rate increases this year. Pricing in interest-rate futures contracts implies the possibility, though not the probability, of a cut in 2019. Economists also predict policy makers will lower their own projections for the path of rates over the coming three years, removing one previously projected hike. They expect only modest changes to economic forecasts from the FOMC compared to those submitted in December, including a downgrade to the 2019 growth outlook to 2.2% from the 2.3% pace that policy makers had previously projected.
Assessing the pivot made by Fed officials in January toward a more dovish policy stance, economists assigned most of the shift to financial market turmoil and the weakening prospects for global growth. In comments submitted with the survey, several economists also pointed to weak inflation. The group largely dismissed President Donald Trump’s heavy criticism of Fed rate hikes as a factor. Looking forward, respondents continued to see downside risks to growth and inflation as far outweighing upside risks. They also identified slowing global growth as the biggest threat to the US economy in 2019, followed by international trade disputes and Fed tightening. “The least serious threat to the US economy is higher inflation stemming from overheating in the economy,” said Kathleen Bostjancic, an economist at Oxford Economics.
In a series of questions on the Fed’s balance sheet, economists predicted officials will reveal this week that they intend to halt a gradual shrinking of their bond holdings in the fourth quarter. The survey found that bank reserves will total about $1.2tn and the Fed’s overall balance sheet will stand at about $3.5tn once the process is brought to a close. The bond portfolio ballooned as a result of three rounds of massive asset purchases to shelter the US economy from the Great Recession. More than half of respondents believe the Fed will eventually skew the maturity distribution of its bond holdings – either somewhat or heavily – towards short-dated securities. Asked about the Fed’s previously announced yearlong review of strategy, policy tools and communication practices, most said it was either “somewhat unlikely” or “highly unlikely” that the Fed would adopt a new strategy for achieving price stability. If, nonetheless, the Fed does so, respondents overwhelming said that new strategy would be average-inflation targeting.
Under such a strategy, the Fed would aim for the average inflation rate over a given period to hit their 2% target. This would imply deliberately pushing inflation higher than 2% after a period of under-shooting, and vice-versa.Currently, the Fed always seeks to hit the target without compensating for past misses.
Sources and photo-credits: Bloomberg, Gulf Times