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The Fed will stick with a 75 basis point hike in July; 40% chance of a recession

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The Federal Reserve Building in Washington DC on September 1, 2015. REUTERS/Kevin Lamarque/File Photo

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BENGALORE, July 21 (Reuters) – The US Federal Reserve will opt for another 75 basis point rate hike at next week’s meeting to quell persistently high inflation as the chance of a recession rises to 40% next year, a Reuters poll of economists has shown.

Inflation reached 9.1% in June, another four-decade high, stoking expectations that the Fed, which just switched from 50 to 75 basis points at the last meeting, will act even more decisively and go up 100 basis points. read more

But some of the Fed’s most hawkish officials have spoken publicly in favor of a 75 basis point hike, tempering those expectations in recent days. Last month’s rise of 75 basis points was the first of its kind since 1994. read more

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A July 14-20 Reuters poll showed that 98 out of 102 economists expect the Fed to raise rates by 75 basis points at the end of the July 26-27 meeting to 2.25%-2.50%. The remaining four said they expect a 100 basis point increase.

Fed fund futures are priced at a one-in-five chance of a full percentage point hike, which is pretty much in line with those expectations with the survey results.

But what is already the most aggressive rate hike in decades brings with it increased fears of a recession.

The median forecasts of the latest poll showed a 40 percent chance of a recession in the US next year and a 50 percent chance of it occurring within two years. This was a significant increase from 25% and 40% in the June survey.

β€œIt looks like there is an inflationary tax being levied on consumers that continues to pile up and hurt, eventually pushing the economy into a mild recession,” said Aditya Bhave, senior US economist at Bank of America Securities.

More than 90% – or 47 of 51 respondents – said any potential recession would be either mild or very mild. Only four said it would be serious.

Meanwhile, a slowdown in growth, and with it inflation, is likely to force the Fed to cut the size of the rate hike at future meetings, the poll showed.

The vast majority expects the Fed to cut rates to 50 basis points in September and then raise it by just 25 basis points in the November and December meetings. These views have hardly changed since the last poll.

More than 80% of respondents, 82 out of 102, saw the federal funds rate at or above 3.25% to 3.50% by the end of this year. According to the median forecast, there has been no change in where and when the Fed will stop raising rates, at 3.50-3.75% in the first quarter of 2023.

However, price pressures are expected to remain elevated and exceed the Fed’s 2% rate target in the coming years. Inflation as measured by the consumer price index is projected to average 8.0%, 3.7% and 2.5% in 2022, 2023 and 2024, respectively.

The unemployment rate is projected to average 3.7% this year before rising to 4.0% in 2023 and 4.1% in 2024. This is still low compared to historical periods and far from the highs seen at the start of the pandemic-driven recession in 2020.

Economic growth forecasts, meanwhile, were downgraded across the board. After an unexpected contraction in the first quarter of 2022, growth in the second quarter was recorded at a seasonally adjusted only year-on-year rate of 0.7%, compared to 3.0% forecast last month. More than one in five predicted another contraction.

GDP growth has fallen to 2.0% this year from 2.6% forecast last month and will nearly halve to 1.2% in 2023, when the economy is fully impacted by the Fed’s rate hike.

(More stories from Reuters Global Economic Poll:)

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Reporting by Prerana Bhat and Indradeep Ghosh, interview by Susobhan Sarkar and Sarupya Ganguly; Edited by Ross Finlay and Deepa Babington

Our Standards: Thomson Reuters Trust Principles.

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