Economists forecast multiple US rate rises next year
The Federal Reserve is set to follow a much anticipated interest rate rise this week with two to four more increases next year, leading economists say.
Markets are bracing themselves for the first US rate rise in almost a decade on Wednesday. A Financial Times poll of 51 top economists highlights the stakes as any increase would have profound consequences for the world economy, particularly emerging markets.
While the Fed’s previous September forecasts pointed to four rises of a cumulative 100 basis points next year, markets have priced in a more gradual tightening process, because of doubts over the US economy’s capacity to weather tighter monetary policy and potential turbulence abroad.
Chinese officials have acknowledged that Fed rises would increase pressure on the renminbi and contribute to outward flows of capital, an outlook shared by many other developing economies. The European Central Bank’s chief economist, meanwhile, told the FT his institution stood ready to respond if the Fed’s actions increase global borrowing costs.
The Fed has gone to great lengths to prepare the markets for a quarter-point rise at this week’s meeting — a move expected by all but one of the economists surveyed. But there is no such consensus over how high interest rates will ultimately go.
Among those polled, 24 per cent expected two rises next year of 25 basis points each, 39 per cent expected three rises and 30 per cent forecast four rises.
Overall, the median projection in the FT poll is for the Fed to lift rates by 75 basis points in 2016 and a further 100 in 2017.
On the margins, two economists expect the Fed to lift its benchmark rate by as many as 300 basis points over the next two years. One cautions the central bank may only increase rates once more after December — by just 25 basis points — over the next 24 months.
Janet Yellen, the Fed chair, has suggested that moves will be gradual, but it is not clear whether there will be formal guidance to that effect in the Fed statement this week.
Several economists warned that the Fed’s ability to increase rates would be constrained by the combined effect of an economic slowdown and dollar appreciation against other currencies.
Overall, the economists put the odds of a technical recession in the next two years at roughly 15 per cent and the probability that the Fed would have to cut rates back to zero at 20 per cent.
Some on the Federal Open Market Committee have indicated they want to see firmer signs of prices heading in the right direction to justify future rises. Eric Rosengren, the Boston Fed president, told the FT last month: “If we weren’t seeing wages and prices moving up over time our willingness to keep raising rates would go down.”
Few of the economists surveyed by the FT said they expected US economic activity or the labour market to deteriorate substantially over the coming months. However they noted that movements in the dollar have tightened financial conditions and weighed on the country’s manufacturing sector.
“Two weeks ago chair Yellen indicated that the conditions the committee has set for lift-off were close to being met — a statement which was followed shortly after by a strong payroll report further supporting the case for a hike,” said Michael Feroli at JPMorgan. “While these developments may have sealed the deal for a move next week, we don’t think the FOMC wants to pre-commit to anything after that.”