Fed to stay the course with 25 bps rate hike on March 22: Reuters poll

By Prerana Bhat and Indradip Gosh

BENGALURU (Reuters) – The U.S. Federal Reserve will raise interest rates by 25 basis points on March 22 despite recent banking sector turmoil, according to a strong majority of economists polled by Reuters who were divided on the risks to their terminal rate view.

Market pricing for the next meeting has been a roller-coaster ride. After Fed Chair Jerome Powell’s testimony last Thursday, we were expecting a move of 50 basispoints. However, there was a pause at one point after the collapse of some regional bank branches.

The U.S. Treasury yields on two-year bonds, which usually reflect near-term interest rates expectations, dropped more than 80 basis point this week following the failure of Silicon Valley Bank. This was the largest bank collapse since 2008.

Reuters poll forecasts for March meeting held steady as last month. 76 out of 82 economists predicted a quarter-point increase in line with future interest rates, bringing federal funds rate to 4.75%-5.0%.

This would be after the European Central Bank decided on Thursday to continue with its 50 basis point increase it announced in February. It prioritized sticky inflation.

In the Fed’s latest poll, only five people expected a pause. Four primary dealers were among them. Nomura, however, was expecting a 25-basis point reduction.

“The past week’s financial turmoil will give the Fed some misgivings about pushing rates much higher,” Bill Adams is the chief economist at Comerica Bank. “But the Fed’s policymakers have repeated many times they are more worried about raising rates too little than raising them too much.”

“A pause in March is possible, but they are more likely to hike and risk erring on the side of too much restraint.”

Some respondents were reluctant to provide an outlook on the rate beyond March. However, 56 of 64 economists stated that at least one more 25-basis point hike would occur in the second quarter. This will bring the fed funds rates to a peak level of 5.00% to5.25%, as per the previous poll.

Respondents to an additional query were almost evenly divided on the risks of their terminal rate forecast. Only 12 respondents said the peak rate could fall below what they expected.

In previous polls, significant majorities believed that the risks were biased towards a higher rate of terminal death.

“We see considerable uncertainty about the Fed’s path in March and beyond,” David Mericle (chief U.S. economics at Goldman Sachs), was one of those few who predicts a pause for March. “It is hard to be too confident at this point.”

Mericle anticipates more hikes, however, with a peak rate at 5.25%-5.50% in Q3, which is higher than the poll median.

According to the poll, a median probability of a U.S. economic recession in the next two years was 65% and a forecast of growth of just 1.0% for this and next year.

Many economists believe that the Federal Open Market Committee will continue to operate. “higher for longer” Keep rates at a minimum for the rest of the year by using the mantra

Only eight of the 63 respondents with an ending-2023 view had a forecast cut that was similar to market expectations.

The poll found that inflation, which is still well above twice the Fed’s mandate of 2%, will continue to rise at least until 2025. The unemployment rate forecasts for this month are significantly lower than the last month’s.

“If the FOMC now aborts its mission to stamp out inflation from the system, it loses credibility as an inflation fighter and long-run inflation expectations are likely to become unanchored,” Philip Marey, Rabobank’s senior U.S. strategist.

(Other stories from Reuters’ global economic poll

(Reporting by Prerana Bhatti and Indradip Gaho; Polling by Anitta Sonil, Sarupya Ganguly, and Mumal Rathore. Editing by Ross Finley & Jan Harvey.

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