Economists believe the Fed will keep raising rates despite the banking turmoil

The Federal Reserve will continue to hike interest rates and keep it above 5.5 percent for the rest of the year despite the turmoil in the US banking sector, according to a majority of leading academic economists polled by the Financial Times.

The latest survey, conducted in partnership with the Initiative on Global Markets at the University of Chicago’s Booth School of Business, suggests the Federal Reserve still has work to do to stamp out stubbornly high inflation, even if it does she’s grappling with a crisis among mid-tier lenders after the Silicon Valley Bank implosion.

Of the 43 economists surveyed between March 15 and March 17 — just days after US regulators announced emergency measures to curb contagion and strengthen the financial system — 49 percent forecast the federal funds rate this year will peak between 5.5 and 6 percent.

That’s up from 18 percent in the previous survey in December and compared to the current level of the rate of between 4.50 percent and 4.75 percent.

Another 16 percent estimated the top would be 6 percent or more, while about a third expected the Fed to fall below those levels and cap its so-called “final rate” below 5.5 percent. Additionally, nearly 70 percent of respondents said they don’t expect the Fed to cut before 2024.

You see a snapshot of an interactive graphic. This is most likely because you are offline or JavaScript is disabled in your browser.

The policy stance most economists are projecting is significantly more aggressive than current expectations, as reflected in Fed funds futures markets, underscoring the uncertainty surrounding not only Wednesday’s Fed rate decision but also developments in the coming months.

Traders have been paring back how much more the Fed will squeeze the economy since last Friday amid financial stability concerns. They are now betting that the central bank will hike interest rates by just another quarter of a point before ending its tightening campaign. That would result in a final rate of just under 5 percent. They also increased bets that the central bank would quickly change course and make cuts this year.

“The Fed is really caught between a rock and a hard place,” said Christiane Baumeister, a professor at the University of Notre Dame. “They need to keep fighting inflation, but now they need to do so against a backdrop of heightened stress in the banking sector.”

But Baumeister, who took part in the survey, urged officials not to end their monetary tightening campaign “prematurely,” calling it a “question to preserve the Fed’s credibility as an inflation-fighter.”

Around half of respondents said SVB-related events had caused them to lower their forecasts for the fed funds rate by the end of 2023 by 0.25 percentage points. About 40 percent was split evenly between the flight, which ended up causing no change or possibly further tightening, and half a point’s worth of looser central bank policy.

A majority believed that the measures taken by government agencies were “sufficient to prevent further bank runs during the current rate hike cycle”.

You see a snapshot of an interactive graphic. This is most likely because you are offline or JavaScript is disabled in your browser.

Jón Steinsson of the University of California, Berkeley was one of the panelists who concluded that the Fed and its regulatory peers had been successful in containing the turmoil, saying it would be “a mistake to change the tightening cycle significantly.”

The more hawkish stance stems from a more pessimistic view on the inflation outlook.

Most of the economists polled expect the Fed’s preferred measure — the personal consumption expenditure index — to remain at 3.8 percent through year-end, about a percentage point below the January level but still well above it Central Bank 2 percent target. In December, the mean core PCE estimate for the end of 2023 was 3.5 percent.

In fact, nearly 40 percent of respondents said it was “somewhat” or “very” likely that core PCE would still be above 3 percent by the end of 2024. That’s roughly double the December share.

Deborah Lucas, a finance professor at the Massachusetts Institute of Technology who took part in the survey, said she takes a more benign view of the inflation outlook but cautioned that the Fed’s tools are largely ineffective in addressing what they describe as a supply problem looks at shocks, “aggressive” fiscal policies and increased savings by Americans.

“What the Fed will do if they raise interest rates too aggressively is they will stop necessary investment and do very little about inflation,” she said.

An ongoing debate is how severe the credit crunch is across the country as the regional banking sector falters.

You see a snapshot of an interactive graphic. This is most likely because you are offline or JavaScript is disabled in your browser.

Stephen Cecchetti, an economist at Brandeis University who previously headed the currency and economics department at the Bank for International Settlements, said he expected demand to “pull back” overall.

“Financial conditions are tightening without doing anything,” he said of the Fed.

A slim majority expects the National Bureau of Economic Research — the official arbiter for when and how the U.S. recession will end — to declare a recession in 2023, with the majority believing it will happen in the third or fourth quarter. In December, a majority expected this to happen in or before the second quarter.

Still, the recession is forecast to be shallow, with the economy still set to grow 1 percent through 2023. According to forecasts , the unemployment rate will increase from the current 3.6 percent to 4.1 percent by the end of the year . 61 percent of the economists calculate that it will ultimately reach between 4.5 and 5.5 percent at the top.