Bengaluru – A consensus of 106 economists polled by Reuters predicts that the U.S. Federal Reserve will raise its benchmark overnight interest rate to the 5.25 percent-5.5 percent range on July 26. However, many believe that this increase will mark the end of the current tightening cycle. Despite a resilient economy and historically low unemployment, inflation is on the decline, with the consumer price index (CPI) measure slowing to 3 percent in June. This has led to speculation among observers that rate cuts could occur by the end of 2023. The ongoing debate centers around whether further rate increases are necessary to sustain disinflation or if they would harm the economy. Federal Reserve Chair Jerome Powell and other officials have indicated that more tightening is imminent, despite pausing rate hikes at the last policy meeting. While the majority of economists still expect rate cuts in the near future, the share of respondents predicting cuts by the end of March next year has dropped from 78 percent to 55 percent. Despite this, caution remains, as there have been past instances of inflation falling short of expectations. The latest projections from the Federal Reserve’s policy-setting Federal Open Market Committee indicate that the overnight interest rate will peak at the 5.5 percent-5.75 percent range. However, only 19 out of 106 economists polled believe that it will reach that level. The expectation that the Fed is near the end of its hiking cycle has weakened the dollar against major currencies, potentially raising import costs and keeping inflation pressures elevated. Economists still express concerns that inflation may not decrease quickly enough. An additional question in the poll revealed that 20 of 29 respondents expect core inflation, which excludes food and energy prices, to remain around its current level of just under 5 percent by the end of the year. The Fed targets inflation, measured by the personal consumption expenditures index (PCE), at 2 percent. However, none of the inflation gauges, including CPI, core CPI, PCE, and core PCE, are expected to reach the 2 percent target until at least 2025. The survey also revealed that the labor market is expected to remain strong, with the unemployment rate rising slightly to 4 percent by the end of 2023. Wage inflation is considered the most stubborn component of core inflation. The majority of respondents (27 out of 41) expect a U.S. recession within the next year, with 85 percent of them predicting that it will begin in 2023. Despite the concerns, the economy is expected to grow 1.5 percent this year, an increase from the previously predicted 1.2 percent, before slowing to 0.7 percent next year.
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