The U.S. Federal Reserve will not raise interest rates for the first time in well over a year at its June 13-14 meeting, according to economists polled by Reuters, but a significant minority expects at least one more hike this year as the economy remains resilient.
Fed Chair Jerome Powell signaled in May that the U.S. central bank might soon pause its hiking cycle to assess the impact of an historically aggressive 500 basis points worth of tightening, having raised rates at every meeting since March of 2022.
More than 90% of economists, 78 of 86, polled June 2-7 said the policy-setting Federal Open Market Committee would hold its federal funds rate at 5.00%-5.25% at the end of its meeting next week. The remaining eight expect a 25-basis-point rise.
Since the Fed's last policy meeting in May, strong economic data and comments from a few of its officials have encouraged markets to price in a hike at or before the July 25-26 meeting, with earlier expectations for rate cuts later this year receding quickly.
That hawkish change in market expectations has helped boost the U.S. dollar to its highest level since March.
The trouble is that inflation has not fallen quickly enough - it was running in April at 4.4% based on the Fed's preferred measure and 4.7% when stripped of volatile food and energy prices. The central bank has a 2% inflation target.
"Powell expressed his bias in favor of remaining on hold in June ... he's going to stick with that as it gives them an additional month of data to look at, although I seriously doubt whether that will give them any new insights," said Philip Marey, senior U.S. strategist at Rabobank.
In the meantime, the U.S. job market has remained remarkably strong, with unemployment rising but still remaining well below 4% and wage inflation falling slowly.
The housing market, which is normally highly sensitive to interest rates, has also withstood the higher borrowing costs for much longer than many expected, with only minor price falls from the levels seen during the pandemic-related boom.
U.S. Treasury Secretary Janet Yellen said on Wednesday the economy was strong amid robust consumer spending but some areas were slowing, and that she expected continued progress in bringing inflation down over the next two years.
RECESSION FEARS RECEDE
More than one-third of respondents in the poll, 32 of 86, say the Fed will hike at least once more this year, including the eight who say that will happen in June and 24 who expect a rate rise in July after a pause. Only one predicted a hike in both June and July.
If the Fed decides to go for a June hike, it would follow in the footsteps of the Bank of Canada, which surprised markets on Wednesday by hiking its key overnight benchmark rate by 25 basis points to 4.75%. The Canadian central bank had been on hold since January.
Just over 25% of economists in the poll, 23 of 86, forecast at least one Fed rate cut by the end of 2023, but that is down from 28% in the last poll. Markets are pricing around a 60% chance of a rate cut this year.
The U.S. Labor Department is due to release consumer price inflation data on June 13, the first day of the Fed meeting.
"There is not a substantial economic difference between raising policy rates in June or doing so in July. But communicating why rates should not rise in June, despite data to the contrary will be challenging," said Andrew Hollenhorst, chief U.S. economist at Citi, who expects a 25-basis-point increase at both the June and July meetings.
"If most Fed officials feel at least another 25-basis-point hike will be necessary, it seems simplest to deliver that hike in June rather than 'skip'."
Fewer than 60% of respondents to an extra question, 28 of 48, said the world's largest economy would fall into a recession this year, compared to more than 70% in a poll just a few weeks ago.
Although the median forecast from the poll has the economy contracting 0.4% and 0.5% in the last two quarters of this year, respectively, that alone would not necessarily mean recession.
The National Bureau of Economic Research - the official arbiter of U.S. recessions - also looks at other factors to officially declare a recession, including employment and real income.
Inflation as measured by core PCE was forecast to remain above 2% at least until 2025.
"The longer they don't hike, the longer the economy is going to continue expanding above trend ... the longer you postpone that decision, the harder it is going to be to bring inflation lower," said Oscar Munoz, chief U.S. macro strategist at TD Securities, who forecasts one more rate hike next week.
(For other stories from the Reuters global economic poll:)
