Economists see Fed defying expectations for rate hikes

[NEW YORK] A majority of economists see the Federal Reserve holding interest rates steady at this month’s meeting and through the end of 2027, even as market odds for a rate hike have increased, according to a Bloomberg survey.

Economists cited tempering inflation and the proximity of the midterm elections in the US as reasons for policymakers to leave rates unchanged at their Sep 15-16 meeting and again in October. Just 13 of 48 respondents, polled Sep 4-9, said they expected a rate increase this month.

That contrasts sharply with investors, who see a 70 per cent chance of a hike next week, perhaps reflecting the unusual level of uncertainty surrounding the near-term direction of monetary policy under Fed Chairman Kevin Warsh.

While inflation accelerated earlier this year – driven by higher energy prices, tariffs and investments related to artificial intelligence – it has moderated a bit in recent months. Fed officials are split, with some wishing to raise rates to ensure that prices cool to the central bank’s 2 per cent target, and others anticipating the disinflationary trend will continue on its own. Economists appeared to agree more with the patient camp. 

Yelena Shulyatyeva, senior US economist at the Conference Board, said she expected the Fed to hold rates at the September, October and December meetings, but warned that any uptick in inflation could change this.

“If inflation data decisively points to acceleration, then the FOMC will be forced to act regardless of the timing regarding the mid-term elections,” Shulyatyeva said in her survey response, referring to the rate-setting Federal Open Market Committee.

The August consumer price index report could prove decisive for the Fed’s rate move next week.

The heightened focus on this month’s meeting comes after Warsh, in a speech last month at the Fed’s annual conference in Jackson Hole, Wyoming, said inflation had not meaningfully slowed. That reignited bets for a rate hike. There’s also a sense among economists that the Fed might be hamstrung at its following meeting in October, which comes days ahead of the US midterm elections.

“The election calendar provides some additional support for our call for the Fed to remain on hold,” said Nomura Holdings’ Ruchir Sharma. 

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Half the respondents to Bloomberg’s survey said the proximity of the Fed’s October meeting to the Nov 3 elections means policymakers will require “especially strong data” to adjust interest rates. Some 43 per cent said the election won’t have an impact on the decision. 

If Fed officials again vote to hold rates steady this month, most economists expected the same three policymakers who dissented in July – Cleveland Fed President Beth Hammack, Minneapolis’ Neel Kashkari and Dallas Fed chief Lorie Logan – will do so again. Should the Fed raise rates, economists saw dissents from Vice Chair for Supervision Michelle Bowman, New York Fed President John Williams and Governor Christopher Waller as likely.

Two-thirds of the economists anticipated no meaningful change to the Fed’s post-meeting statement. In addition, respondents expected policymakers to keep their economic forecasts and interest-rate projections largely unchanged from those submitted in June. Fed officials will continue to signal one rate increase before the end of the year, economists said, before forecasting one quarter-point rate cut in each of the next three years.

Projections for the unemployment rate and underlying inflation will each drop slightly, to 4.2 per cent for unemployment and 3.2 per cent for the core personal consumption expenditures index. Economists broadly see risks to inflation as being to the upside, and 52 per cent say risks to unemployment are “roughly balanced.” BLOOMBERG