By Indradip Ghosh
BENGALURU, Oct 20 (Reuters) – The Federal Reserve will skip raising interest rates this month and deliver a hike in December, according to nearly all economists polled by Reuters, as policymakers signal patience even as stubborn inflation argues for a tougher response.
Despite reports showing a strong economy with hotter-than-expected inflation, Fed officials have recently suggested they prefer a slower, more deliberate path for rates. Fed Chair Kevin Warsh, who has made clear he is not keen on giving guidance, has kept mum.
An overwhelming majority of economists, 94 of 100, in the October 16-20 Reuters poll expect the central bank to hold the federal funds rate in a 3.75%-4.00% range at its October 27-28 meeting, in line with market pricing. That meeting is just days before the November midterm elections.
But all 100 respondents expect a rate hike in December, a sharp reversal from less than half saying so in last month’s poll. The Federal Open Market Committee unanimously raised rates by 25 basis points in September.
“You have a strong economy and you have inflation. There’s really no reason for you to worry so much about getting interest rates higher, this is like the easiest choice,” said Alex Pelle, senior US economist at Mizuho Securities. “Unfortunately, the Fed is really not getting more on top of the issue, they’re just treading water and perhaps even getting a little behind.”
For now, markets and economists are following the messaging, not the data. Conflicting signals from the central bank recently have ridden roughshod over bond markets.
Longer-dated Treasury yields surged to multi-decade highs on October 7 on higher inflation and near-term rate expectations before retreating nearly 25 basis points as the likelihood of an October hike slipped away. Rate-sensitive two-year Treasury note yields have also been whipsawed higher then sharply lower.
“Them not going in October is the wrong call from a policy point of view,” said Pelle. “They’ll go 25 in December, but the risk is greater they end up going 50 than they don’t go at all.”
RISK THE FED NEEDS TO DO MORE
Nearly 60% of forecasters polled see the policy rate peaking at a 4.00%-4.25% range. But the rest, 38 of 92, predict at least two further rate increases, up from just one-fifth in the September survey.
“The risks are in the direction of a Fed that ultimately needs to hike rates more than we expect,” said Michael Gapen, chief US economist at Morgan Stanley.
“If there are risks around the path for the economy and inflation, they do appear tilted to the upside.”
Inflation has been above the Fed’s 2% target for nearly six years.
The Personal Consumption Expenditures (PCE) Price Index, the Fed’s preferred inflation gauge, will remain more than 100 basis points above 2% over coming quarters and not return to target until at least 2028, poll medians showed.
The rising cost of living, driven by higher energy costs as a result of President Donald Trump’s war with Iran, as well as new tariffs charged on imported goods, is a key political vulnerability for Republicans ahead of the midterm elections.
Oil prices are holding above $100 as the war shows no signs of easing.
Meanwhile, the economy grew at an annualized 2.2% pace in the second quarter, boosted in large part by AI-driven investment. It is forecast to have expanded 3.2% in the quarter just gone by, slowing to 2.2% in October-December.
On an annual basis, the economy is forecast to grow 2.3% this year and 2.1% in 2027, above the 2.0% pace the Fed considers non-inflationary.
“A lot of the resilience we’ve got in the economy is coming through the AI tech buildout. We’re seeing more resiliency in spending. But it’s probably more narrowly driven by upper-income groups who are benefiting from this kind of AI spillover through the equity market,” said Abigail Watt, US economist at UBS.
(Other stories from the Reuters global economic poll)
(Reporting by Indradip Ghosh; Polling by Jaiganesh Mahesh and Debrah Gomes; Editing by Ross Finley and Chizu Nomiyama )
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