A Financial Times poll of leading academic economists, in partnership with the Kent Clark Center for Global Markets at the University of Chicago's Booth School of Business, concluded that "the US Federal Reserve will defy investor expectations and raise interest rates by at least another quarter of a point."

  • More than 40 percent of those surveyed said they expected the Fed to raise interest rates twice or more from the current record of 5.25-5.5 percent, the highest level in 22 years.
  • Nearly half of economists surveyed expect the federal funds rate to peak at 5.5-5.75 percent, signaling another quarter-point rate increase.
  • 35 percent expect the Fed to move two more steps by a quarter point, pushing the key interest rate to 5.75-6 percent.
  • A small group (8 percent) believes that the official interest rate will exceed 6 percent.
  • This contrasts sharply with the mood in financial markets, where traders in federal funds futures believe that the US central bank's policy is constrained enough to control inflation and can therefore keep interest rates steady until 2024.
  • Completely eliminating price pressures and reducing inflation to 2 percent (target level) will require more prohibitive borrowing costs from market participants.

Julie Smith, an economics professor at Lafayette College (based in Easton, Pennsylvania), said, "Some of the signals we are getting are that policy is not that tough," noting that interest-rate-sensitive sectors such as the housing market have remained "surprisingly strong" despite previous hits. "There doesn't seem to be enough consumer pullout to slow the economy, and I think that's really the problem."

Inflationary pressures

While inflationary pressures have receded and the labor market has declined, many economists surveyed worry that the underlying momentum in the world's largest economy remains very strong and that inflation will become more difficult to eradicate.

Gordon Hanson, a professor at Harvard's Kennedy School, said: "Just as there were concerns that the Fed was too slow to respond, you don't want the Fed to be too quick to relax."

Mazen Salhab, chief market strategist at BDSwiss MENA, says in his analysis of the Fed's trends that the current interest rates in the United States of America have now reached 5.5 percent, the highest since before the years of the 2008 global financial crisis, specifically since 2002.

Countering inflation

He adds, in exclusive statements to the site "Economy of Sky News Arabia": There is no doubt that facing US inflation, which reached 3.7 percent last month, which is higher than the Fed's target of 2 percent, will remain the biggest challenge in the interest rate hike cycle, which may be coming to an end from a historical-economic angle. But economic figures are determined, so it is necessary to point out very important details, as follows:

  • First: The adaptive policy of the US Federal Reserve is here to remain for political and economic purposes, and therefore the Fed will continue its work and rely on data, even if this is not mentioned in its previous and subsequent statements.
  • Second, will the U.S. economy bear a rate hike above 5.5 percent? Of course, stock indices and riskier assets do not favor high interest because they reduce their attractiveness against cash yields and the return on the US dollar in the bank (an easy, safe and currently good investment), but stock indices are not the real economy, so the Fed does not matter much how the market reacts.

What the figures say is that the U.S. labor market has remained stable and strong, unemployment rates are historically low at 3.8 percent (the lowest in more than fifty years), and labor market participation has reached 62.8 percent, the best in more than three years, but has not yet reached what it was a decade ago, close to 64 percent in 2012-2011.

He adds: The Fed will not intervene and cut interest rates unless the real decline in the US labor market associated with high unemployment and this is not happening now and the nature of the economic cycle takes several months for the numbers to show a radical change.

  • Third, the recent rise in US inflation to 3.7 percent in August was due to the rise in energy prices (10.6 percent in US fuel prices) and rental rates fell 1 percent as housing and shelter inflation declined. Not to mention the dramatic decline in food inflation, which reached 3 percent, and was at 13.5 percent a year ago.

All this leads us to believe that the recent rise in US inflation is not a turning point, and will push the US Federal Reserve to keep interest rates unchanged and unraised at the September meeting.

  • The most likely scenario is to leave the door open to judge the trajectory of the US economy at the US Federal Reserve meetings next November, and the last meeting in 2023, which will be on December 12/13.
  • Fifth: What the markets are currently reading and is considered a profound change in the pricing of the interest rate path, is that the US interest rate will remain high for a longer period than expectations above 4 percent for the next two years, and we believe that these expectations are strong and to some extent exaggerated because the mere beginning of the contraction of the US economy will be followed by a decline in interest rates faster than the markets are currently reading. The interest rate level between 2.5 percent to 3 percent may make sense (for banks, retail borrowers and businesses) if inflation stabilizes at the Fed's 2 percent target without a severe deflation or decline.
  • Sixth, we believe that the strong rhetoric of the US Federal Reserve may continue for some time, not because of confidence in the economy, but because pushing down asset prices will help bring inflation back to the 2 percent target.

Fed Decisions

During its last meeting in July, the US Federal Reserve raised interest rates by 25 basis points (a quarter of a percentage point), reaching a range of 5.25 percent and 5.50 percent, in line with previous expectations, bringing interest rates to their highest levels in nearly 22 years. It was the 11th increase since the beginning of last year.

The Fed kept interest rates unchanged during its June meeting, after 10 consecutive hikes that began in March 2022.

  • On Friday, US Federal Reserve Chairman Jerome Powell said that the US central bank is ready to "raise interest rates if necessary" and that it will continue its tight monetary policy, until inflation moves towards the set target of 2 percent.
  • The Federal Reserve raised interest rates 11 times from last year in a bid to rein in inflation, which remains above its target of 2 percent.

Inflation

The report of the British newspaper "Financial Times" pointed to the concerns of economists about the possible repercussions of reducing oil supplies on inflation expectations. Christian Baumeister, a professor at the University of Notre Dame, predicted a further rise in prices (oil) that could increase future inflation expectations as well as delay the fall in core price growth if companies choose to transfer higher costs to consumers.

A sharp slowdown in China's economy could offset this, and it is expected to lead to lower global growth in the coming months.

  • The annual inflation rate in the United States accelerated in August, more than expected due to increases in fuel prices, which puts pressure on the US Federal Reserve to end the wave of monetary tightening.
  • Data from the US Department of Labor showed on Wednesday that the consumer price index rose in August at the fastest pace in 14 months, recording 3.7 percent year-on-year, compared to 3.2 percent in July.
  • On a monthly basis, the consumer price index rose 0.6 percent, as expected, after rising only 0.2 percent in July.
  • U.S. statistics showed that higher gasoline prices contributed to the overall inflation rate, but the base rate, which excludes food and volatile energy prices, fell year-on-year to 4.3 percent in August, its lowest level in almost two years.
  • But on a monthly basis, the core inflation index rose in August to 0.3 percent, for the first time in six months, versus expectations that it will stabilize at the same level as in June and July of 0.2 percent.

Different scenarios

For his part, the American writer and analyst, Hazem Ghabra, said in exclusive statements to the site "Economy Sky News Arabia" that there is a clear division among analysts about what the Fed will do in its upcoming meeting.

On the one hand, the Fed is seeking to successfully reach its 2 percent inflation target, and is doing so frantically and rapidly (in the context of raising interest rates to rein in inflation), reinforcing the political dimension associated with the White House and the government's desire to emphasize overcoming inflation and their success in delivering on their promise. On the other hand, there are obvious pressures on the US economy, and the stock market, that need to be dealt with.

He added: "Many believe that it has not been enough time for the results of the rate hike to fully show the markets, and we should wait a bit. "There are voices saying that the U.S. stock market and companies should not be hurt by raising interest rates without waiting enough for the Fed to show results."

But he said that "it is clear that there is success in curbing inflation without clear and tangible harm to the US economy, compared to similar economies such as the British economy, for example, where the interest rate is 4.5 percent, which is relatively close to the American rate, while there is a gap between inflation rates in the two countries."

He stressed that "it is unclear where the Fed will go, and whether it will maintain interest rates or allow another quarter-point increase in this meeting and will not increase," explaining that:

  • Today's market advice for the Fed is to wait a bit, but there may be political trends and motives and a desire from the Fed to achieve its goal as soon as possible.
  • But signals sent by the Fed suggest that it could raise rates twice, each time by a quarter-point, until the end of the year.

Ghabra continued: "The positive thing about all this is that the light at the end of the tunnel has become clear, and inflation control is approaching. The trend is that when inflation is curbed the rate cut will be started, after stabilization over the next year, and the cut could be in early 2025 or the end of 2024."

Goldman Sachs recently lowered its forecast for the United States entering a recession from 20 percent to 15 percent.

US Federal Reserve Chairman Jerome Powell had previously said that the resilience of the US economy may push the Fed to implement more interest rate increases in the coming period.

During a speech at the Jackson Hole summit, Powell noted that the U.S. economy, the world's largest, is growing more than expected and that consumer spending is accelerating, trends that could keep inflationary pressures going in the country.

He also underscored the Federal Reserve's determination to keep the key interest rate high until rate increases are reduced to the U.S. central bank's 2 percent target.

Posts

Going back to the survey results, participating economists were more optimistic about the prospects for a soft landing, as the Fed can reduce inflation without excessive job losses.

More than 40 percent said it was "to some extent" likely that a reduction in inflation would be achieved again around 2 percent without the unemployment rate exceeding 5 percent. Another quarter of respondents said it was "more likely than not". When asked when the next recession would be, many pushed their estimates further than they had previously expected.

The latest data from the Department of Labor showed that the US economy added more new jobs in August than expected, but nevertheless unemployment rose higher than expected and the rate of wage increase in August grew at the slowest pace since February 2023, boosting bets that the US Federal Reserve may stop rate hikes.

This comes as the US economy achieved lower-than-expected growth in the second quarter of this year, giving a clear indication that the policies pursued by the Fed are capable of curbing growth in the country.