An academic survey shows that sustained inflation pressures will force the Federal Reserve to adjust its rate path, with only one rate cut possible this year.
At the end of May, the Booth School of Business at the University of Chicago conducted an economic survey of economists. The results showed that of the 39 economists surveyed, more than half said the Federal Reserve would only cut interest rates by 25 basis points once this year. Nearly a quarter predicted there would be no interest rate cuts at all this year.
One-third of those surveyed, the largest proportion, believe the Federal Reserve will make its first interest rate cut this year in September, at the last meeting before the November 5 presidential election.
Karen Dynan, a Harvard University professor and survey respondent, said recent data had raised concerns about whether inflation was entrenched. While April CPI cooled slightly, the job market continued to show strong inflation signals, with 272,000 non-farm jobs added in May, exceeding all Wall Street expectations, and hourly wages accelerating.
Economists in the survey raised their forecast for favored consumer price spending inflation (PCE) by the Federal Reserve, from 2.5% in March to the current 2.8%, well above the central bank's 2% inflation target.
Economists' expectations of a soft landing for the U.S. economy have also increased. The poll showed that 52% of respondents believed the U.S. would not see a recession until 2026 or later, up from 46% in March.
June is likely to stand pat.
The Federal Open Market Committee is expected to maintain interest rates unchanged but lower the number of rate cuts this year to below three.
Despite Canada and the euro zone cutting interest rates beforehand, Fed officials still believe the strong job market gives them reason to sit still.
Claudia Sahm, former Federal Reserve employee and now chief economist at investment management company New Century Advisors, said if the May CPI unexpectedly rises, the Federal Reserve will adjust the number of interest rate cuts from three to one.
Sahm said: "The Fed doesn't like to act suddenly unless it has to." "But they want to show they're responding to the data."
How to weigh the timing of the election and interest rate cuts?
Julie Smith, a professor at Lafayette College, believes the Fed may cut interest rates in September and may do so again after the November U.S. election.
Adjusting interest rates before and after the presidential election is a difficult decision that needs to be carefully weighed to avoid giving the impression that the Fed is influenced by politics.
If rates are cut before the election, it may be interpreted as the Fed helping the current president be re-elected; if rates are raised, it may be seen as detrimental to the current president's re-election.
The Fed's decision could have an impact on the election; on the other hand, political pressure could also affect the Fed's decision-making.
Debt storm is coming?
In addition, the survey also stressed economists' concerns about the surge in U.S. government debt.
The Congressional Budget Office (CBO), an official expenditure oversight body, said in May that federal debt would reach 166% of GDP by 2054.
More than half of those surveyed said they believed CBO's debt estimate was credible, and more than a quarter said the estimate was too low.
Michael Hartnett, chief investment officer at Bank of America Merrill Lynch, warned earlier that if the Federal Reserve does not cut interest rates by 150 basis points in the next year, annual interest costs for the U.S. government could rise from $1.1 trillion to $1.6 trillion, based on current trends.
Edited by Jeffrey