The Federal Reserve will have to wind down its pandemic-era stimulus programme quickly and raise US interest rates in 2022 in response to higher inflation, according to a poll of leading academic economists for the Financial Times.
The latest survey conducted in partnership with the FT by the Initiative on Global Markets at the University of Chicago Booth School of Business suggests a much more aggressive approach to tightening monetary policy than the Fed’s most recent projections and market expectations indicate.
Just over 70 per cent of respondents believe the Fed will raise rates by at least a quarter of a percentage point in 2022, with almost 20 per cent expecting the move to come in the first six months of the year. That is far earlier than the 2023 lift-off from today’s near-zero levels that Fed officials pencilled in back in June.
To be in a position to raise rates in 2022, most of the 49 economists polled in the FT-IGM US Macroeconomists Survey expect the Fed to soon reveal its plans to begin reducing or “tapering” its programme of $120bn a month in bond purchases and complete the process by next year.
The US central bank has committed to the current pace of purchases until it sees “substantial further progress” towards average 2 per cent inflation and maximum employment. The first goal has already been met, officials have said, with room for improvement on the second.
More than 40 per cent of the economists believe the Fed will announce tapering at its meeting in November, with 31 per cent expecting it in December. The timeline may slip if coronavirus infections spread further and hiring stalls, many economists warned — a quarter anticipated no announcement until next year.
The survey results, collected between September 3 and September 8, match up closely with the views put forward by more “hawkish” members of the Fed’s policy-setting Federal Open Market Committee, who worry about soaring consumer prices and contend that the US economy can withstand less support.
“In 2022, there will be a sufficiently strong labour market with sufficiently strong wage growth and sufficient concerns about not wanting inflation to stay above 2 per cent for long,” said survey participant Stephen Cecchetti, an economist at Brandeis University, who previously led the monetary and economic department at the Bank for International Settlements.
Roaring demand from consumers flush with pent-up savings alongside severe supply bottlenecks and other shortages have pushed inflation to its highest pace in 13 years and rekindled concerns that price pressures will persist.
The economists, who cited further supply disruptions as a top hazard, raised their median year-end forecast for the Fed’s preferred inflation measurement — core personal consumption expenditures, or PCE — to 3.7 per cent, up from 3 per cent in June. Almost 70 per cent also said it was “somewhat” or “very” likely this gauge would still exceed 2 per cent on a year-over-year basis by the end of 2022.
According to the economists, the inflation rate may be high enough to compel the Fed to short-change its goal of maximum employment and instead raise interest rates before the US labour market has fully healed.
The unemployment rate is expected to stay stubbornly high this year, with economists’ median estimate at 4.9 per cent for December. As of last month it hovered at 5.2 per cent. That pace of job gains means the unemployment rate would not fall back to its pre-pandemic level of 3.5 per cent until 2023, 43 per cent of the respondents said, while 23 per cent assumed it could take until 2024 or later.
“They will make a macro error [and] raise rates too soon,” said panellist Danny Blanchflower, an economist at Dartmouth University and a former member of the Bank of England’s Monetary Policy Committee. He added that the unemployment rate could fall as low as 2.5 per cent before contributing to inflation, warning that the risk that the labour market sputters was “hugely higher” than the prospect that employment improves quickly.
Another risk, according to Nicholas Bloom of Stanford University, is a repeat of the destabilising 2013 “taper tantrum” that occurred when the Fed signalled it would withdraw stimulus sooner than expected. That view is not shared by the majority of the economists, however, with few anticipating a significant sell-off in US equities or Treasuries over the next six months.
Menzie Chinn of the University of Wisconsin-Madison, who forecast the Fed to end its asset purchases in the first half of 2022 and raise interest rates later that year, attributed the more muted market reaction to the central bank’s success in clearly communicating its policy plans.
One lingering point of uncertainty is chair Jay Powell’s fate at the Fed, given his term expires early next year. More than 80 per cent of the economists surveyed expect him to be renominated, while 18 per cent believe governor Lael Brainard will be appointed.
Source: Economy - ft.com
