The Federal Reserve is expected to keep its key interest rate unchanged at a 22-year high of 5.25-5.5 percent until at least July 2023, according to a new survey of leading academic economists conducted by the Financial Times and the Initiative on Global Markets at the University of Chicago Booth School of Business.
The inaugural FT-IGM survey, which polled 45 economists from top US universities and research institutions, found that the median forecast for the Fed’s policy rate at the end of 2023 was 5.5 percent, implying two more rate hikes of 25 basis points each. The Fed has already raised rates 10 times since March 2022, when it started its aggressive campaign to combat surging inflation amid the post-pandemic recovery.
The economists surveyed also expressed confidence in the US economy’s resilience, with the median forecast for real GDP growth in 2023 at 3.1 percent, well above the Fed’s long-run estimate of 1.8 percent. The unemployment rate, which fell to 4.2 percent in October, was projected to decline further to 3.8 percent by the end of 2023.
The strong economic performance has been fueled by robust consumer spending, which grew at an annualized rate of 12.2 percent in the third quarter, the fastest pace since 2021. Business investment and government spending have also contributed to the expansion, while net exports have been a drag due to supply chain disruptions and a strong dollar.
Inflation risks and uncertainty
However, the economists also acknowledged the challenges posed by elevated inflation, which hit a 31-year high of 6.2 percent in October. The median forecast for the personal consumption expenditures (PCE) price index, the Fed’s preferred measure of inflation, was 4.5 percent for 2023, well above the Fed’s 2 percent target.
The survey respondents were divided on whether the Fed’s current policy stance was appropriate or too loose, with 44 percent saying it was about right, 42 percent saying it was too stimulative, and 13 percent saying it was too restrictive. They also expressed varying views on the main drivers of inflation, with 38 percent attributing it mostly to transitory factors, 33 percent to persistent factors, and 29 percent to both.
The economists also highlighted the uncertainty surrounding the inflation outlook, with a wide range of forecasts and a high degree of disagreement. The standard deviation of the PCE inflation forecasts for 2023 was 1.1 percentage points, indicating a low level of consensus. The 90 percent confidence interval for the median forecast ranged from 2.9 percent to 6.1 percent, implying a significant probability of either undershooting or overshooting the Fed’s target.
Policy implications and expectations
The survey results suggest that the Fed faces a delicate balancing act between supporting the economic recovery and containing inflationary pressures. The Fed has signaled that it will start tapering its monthly asset purchases in November, reducing them by $15 billion per month until they end in mid-2023. The Fed has also indicated that it will not raise rates until the tapering process is complete, unless inflation or financial stability risks warrant a faster pace of tightening.
The economists surveyed expect the Fed to follow through on its tapering plan and keep rates at their peak level through the year’s end. They are split on whether the first rate cut will come in January 2024, with more than one-quarter seeing a reduction then. The median of the group sees the first cut in March, with rates falling to 4.75 percent by June 2024 and ending 2024 at 4.25 percent.
The survey results also reflect the challenges that the Fed faces in communicating its policy intentions and expectations to the public and the markets. The Fed has emphasized that its policy decisions will depend on the incoming data and the evolution of the economic outlook, rather than on a predetermined path or timeline. However, this approach also creates uncertainty and volatility, as market participants may react to changes in the Fed’s projections or statements.
The FT-IGM survey aims to provide timely and relevant insights into the views of leading economists on the US economy and monetary policy. The survey will be conducted quarterly, with the next edition expected in January 2024.