More than half of the economists surveyed estimate the Fed’s quarterly forecasts, to be released when it ends its two-day meeting on Wednesday, will show the median of 18 officials projecting two rate increases next year from current levels near zero.
That represents a shift from September’s predictions, when policy makers were evenly split on whether the start of rate hikes would be in 2022 or 2023. The survey of 49 economists was conducted Dec. 3-8.
“It’s going to be the most restrictive change in the history of the dot plot,” said Laura Rosner-Warburton, senior economist at Macropolicy Perspectives, referring to the Fed’s rate forecasts released since 2012.
Central bank Chairman Jerome Powell told lawmakers on Nov. 30 that it would be appropriate to consider accelerating the tapering of the asset-buying program to end a few months earlier than the originally planned mid-2022 conclusion.
Stimulus withdrawal outlook
“The process of tapering the stimulus program has become a straitjacket, preventing the Fed from responding to higher-than-expected and more persistent inflation,” Philip Marey, senior U.S. strategist at Rabobank, said in a response to the survey. “Therefore, they are likely to double the pace of tapering to create the option to raise the rate in March.”
Bets on interest rate futures markets show about 66 basis points of hikes by the end of next year.
More than half of economists expect the Federal Open Market Committee (FOMC) to double the pace of tapering to $30 billion per month, starting in January and ending in March.
Policymakers are expected to project two rate hikes in 2022, forecast three moves in 2023 and two more in 2024, with rates reaching 1.9% that year. That represents a somewhat steeper rate path than the FOMC projected in September. The path is in line with economists’ forecasts, which project rates to reach 2% in 2024.
Powell’s pivot to a more restrictive outlook on stimulus withdrawal has come on the back of rising inflation. Since the Fed’s Nov. 2-3 meeting, data have shown consumer prices rose 6.2% in October and 6.8% in November, the fastest rate since 1982.
Nearly half of the economists surveyed said the increase, inflation concerns at the White House and Powell’s appointment as Fed chairman have contributed to the stance toward tightening.
The FOMC is likely to expect inflation to persist and raise its 2022 headline inflation forecast to 2.5%, according to the survey. Monetary policymakers are also expected to show unemployment falling to 3.7% by the end of 2022, which would be below their long-term forecast of 4%.
Economists expect the Fed to maintain language in its monetary policy statement that it does not plan to raise interest rates until the country reaches “maximum employment” and inflation reaches 2% and is on track to exceed 2% for some time.
Almost all economists, however, expect the FOMC to modify or remove its phrase that inflation largely reflects factors “expected to be transitory,” after Powell told Congress it’s time to remove the word “transitory.”