A large share of economists now expect at least two U.S. interest rate increases by March of next year, according to a survey released as the prospect of a Federal Reserve rate hike gains momentum. Recent inflation data showed that price pressures in the United States have failed to ease in the aftermath of the Iran war, prompting economists who had expected the Fed to stand pat to revise their forecasts one after another.
In a Reuters survey of economists on the 14th, 86 of 101 respondents, or 85%, said they expect the Fed to raise its benchmark rate by 25 basis points at the September meeting of the Federal Open Market Committee. One basis point equals 0.01 percentage point. Such a move would lift the U.S. benchmark rate to a range of 3.75% to 4.00% from the current 3.50% to 3.75%. It would be the Fed's first rate increase since July 2023.
Economists are shifting rapidly from expecting no change to expecting a hike. In last week's Reuters survey, more than two-thirds of respondents expected the Fed to hold rates steady. Reuters said the last time forecasts changed so sharply just before an FOMC meeting was in September 2024, when the market expected a 25-basis-point cut but the Fed delivered 50 basis points.
Economists changed their forecasts because the latest inflation data showed stronger price pressures than expected. The consumer price index rose 3.4% in August from a year earlier, according to the U.S. Bureau of Labor Statistics. On a monthly basis, it climbed 0.4%, a bigger gain than July's 0.1% increase. Core CPI, which excludes energy and food, rose 2.4% from a year earlier and 0.3% from the previous month. The annual figure matched market forecasts, but the monthly gain exceeded the 0.2% that economists had projected. Many economists also believe the core personal consumption expenditures price index accelerated in August.
Stephen Juneau, an economist at Bank of America, said Fed Chair Kevin Warsh had boxed himself into a position where the economic data would have to be very weak for the central bank to refrain from raising rates. But that data did not materialize, and a stronger-than-expected inflation report followed, he said.
The view that a single increase will not be the end is also gaining ground. Of the 70 economists who provided a rate path, 37, or about 53%, expect at least one additional increase by the end of March next year. That contrasts with the previous survey, in which 56% expected rates to stay at current levels. Diane Swonk, chief economist at KPMG, stressed that a 25-basis-point increase could be the start of tightening rather than the last move.
Some warn that if the Fed holds rates steady, confidence in its commitment to fighting inflation could waver and Treasury yields could climb more sharply. The yield on the 10-year U.S. Treasury note topped 5% that day, the first time it has exceeded that level since October 2023.
Scott Anderson, chief U.S. economist at BMO Capital Markets, said the credibility of the Fed's response to inflation is being tested. If hawkish rhetoric at this meeting is not backed by concrete action, he said, the U.S. Treasury yield curve could steepen considerably.
