Fed to maintain its July 75 bps spike; 40% likelihood of recession

To combat persistently rising inflation as the probability of a recession over the coming year climbs to 40%, the U.S. Federal Reserve would decide against making a larger change at its meeting next week. This is according to a poll of analysts.

Another four-decade high of 9.1 percent was reached in June, fueling hopes that the Fed, which had just recently increased interest rates by 50 to 75 bps at the previous meeting, would move even more firmly and aim for a 100-basis point (bps) boost.

However, several of the most hawkish Fed officials have advocated a 75-basis point increase in public statements, which has tempered those expectations recently. The 75-basis point increase from last month was the most since 1994.

98 out of 102 economists surveyed between July 14 and 20 believe the Fed will raise interest rates by 75 bps to 2.25 percent to 2.50 percent at the conclusion of its meeting on July 26–27. The remaining four predicted an increase of 100 basis points.

Only about a one-in-five likelihood of a complete percentage point raise is priced in Fed funds futures, which puts those expectations substantially in accord with the polling data.

However, the rate hike plan, which is already the strongest extreme in decades, increases concerns about an impending recession.

According to the latest poll’s median forecasts, there is a 40% possibility that the United States will experience a recession in the next year and a 50% chance that one will occur during the next two years. That was a huge increase from 25% to 40% in a June poll.

According to a veteran U.S. economist at the powerhouse Bank of America Securities, Aditya Bhave, it is understood that there seemed to be an inflation tax on the consumers, and that kept building up. Sooner or later, it then might take its strain and ultimately drive the economy into a slight recession.

47 out of 51 respondents, or more than 90%, predicted that any prospective recession would be either light or extremely mild. Only four people claimed it would be serious.

The poll showed that a slowdown in GDP, and hopefully inflation along with it, was likely to push the Fed to scale back its rate increases in the next sessions.

A sizable majority believes that the Fed will raise rates by only 25-basis points in November and December and slow them to 50-basis points in September. These opinions were essentially unchanged from the previous survey.

82 out of 102 respondents, or more than 80%, predicted that the Federal funds rate will reach 3.25 percent to 3.50 percent or higher through the close of this year. As per the median prediction, the Fed would still cease hiking rates at a range of 3.50 percent to 3.75 percent in Q1 2023.

Over the next years, price pressures were anticipated to continue to be high and beyond the Fed’s target rate of 2%. The Consumer Price Index had projected to show an average inflation rate of 8.0 percent, 3.7 percent, and 2.5 percent in 2022, 2023, and 2024, respectively.

According to predictions, the unemployment rate will rise to an average of 3.7 percent this year, 4.0 percent in 2023, and 4.1 percent in 2024. By historical standards, that is still modest, and it is a long way from the peaks reached just before the virus outbreak-induced recession in 2020.

Meanwhile, all economic growth projections were revised downward. After an unexpected decrease in Q1 2022, only a seasonally adjusted annualised rate of 0.7 percent was projected for Q2 growth, lower than the 3.0 percent forecast made last month. Moreover, half of the respondents projected further contraction.

GDP growth for this year was reduced from the 2.6 percent prediction made last month to 2.0 percent, and for 2023, when the full impact of the Fed’s raising rates will be seen by the economy, it was almost halved to 1.2 percent.