FRS will raise rate by 0.5% in December, but peak of tightening could be even higher

The FRS will lower the tempo for interest rate increases by 50 basis points in December. According to a Reuters survey, economists believe that it is very risky to increase the period of tightening policy and the rate.

It was expected that after raising rates by 75 basis points four times in a row, the FRS would raise rates less in the future. A drop in U.S. inflation below 8% last month helped to confirm this well-established market expectation.

However, according to the latest Reuters survey, it is not the right time to put the FRS's tightening campaign on pause. Inflation in 2023 is predicted to be higher than it was a month ago.

The survey included 84 economists, 78 of whom mentioned the FRS decision to raise rates by half a percent to a range of 4.25-4.50%. Recall that the meeting is scheduled for December 14.

In the beginning of next year, the rate could increase by 25 basis points from the value of last month's survey. It is expected to peak at 4.75-5.00%, and the peak rate range varied from 4.25% to 6.00%.

Philip Marey, senior strategist at Rabobank said that markets are focused on peak inflation, but its baseline trends remain stable. In his view, this could cause the FRS to increase rates next year to levels higher than currently expected.

Despite the gradual easing of price pressures, a return to 2% inflation will not occur until at least 2025.

18 economists out of 29 made a statement that the main risk is price growth. Over the next six months, prices could become higher than expected.

Andrew Hollenhorst, Citigroup's chief U.S. economist said that the softer inflation report is positively influencing on the FRS' desire to slow the pace of rate increases to 50 basis points in December, but the report does not show any convincing signs of slowing inflation to the 2% target.

22 economists out of 30 claim that the recession is not deep. The economy is predicted to grow by only 0.4% next year. On the other hand, the FRS policy tightening cycle is the most aggressive in the last 40 years. It brings with it a 60 percent chance of a U.S. recession. Worries about a deeper recession have encouraged companies to cut thousands of jobs throughout the country.

Currently the unemployment rate is 3.7%. It is expected to rise to 4.6% by the end of next year, and in 2024 it will reach 4.8%. These values are still well below those of previous recessions. Compared to the previous month's survey results, unemployment forecasts were generally higher.

Michael Moran, chief economist at Daiwa Capital Markets America said that a potentially modest rise in unemployment next year does not give confidence that the economy will not fall into recession. He thinks that this would put the Fed in the unusual position of having to maintain restrictive policies during an economic downturn.