By Indradip Ghosh
BENGALURU, Aug 17 (Reuters) – The Federal Reserve will keep its key interest rate unchanged next month and through year-end, according to most economists in a Reuters poll, a view they have held for the past several months.
Market pricing for a September quarter point hike flipped toward a near-70% chance of a hold, after recent news of unexpected job losses in July. Lower-than-expected consumer price inflation, alongside weaker retail sales, has also reinforced the view not all is well with the world’s largest economy.
However, with the U.S.-Iran conflict now in its sixth month and oil prices about 25% above pre-war levels, markets are still pricing in one rate increase by end-December.
Last month, Fed Chair Kevin Warsh reiterated the Fed’s commitment to returning inflation to its 2% target after more than five years above it, but provided no plan of action.
Several Federal Open Market Committee members, including three who dissented in favor of a rate increase last month, have since signalled tighter policy could still be needed if inflation remains elevated. A measure of dissent on the FOMC is likely to continue.
A 90% majority of economists, 94 of 104, in the August 12-17 Reuters poll expected the Fed to leave rates unchanged at 3.50%-3.75% at its September 15-16 meeting, broadly matching last month’s view.
“The debate clearly is about the possibility of rate hikes,” said Ryan Wang, U.S. economist at HSBC, who expects rates to stay on hold.
“We’ve gone through the July inflation numbers, and they were basically neutral. On the activity side the very latest data do show some softening. That could push more FOMC policymakers into the wait-and-see camp rather than in the immediate rate hike camp,” he said.
A near-80% majority, 80 respondents, expected no change in rates through year-end, broadly steady over the last three months. The 22 economists forecasting at least one rate increase this year far outnumber the two expecting cuts.
Poll medians show rates on hold through the end of next year.
But a handful of forecasters see a rate increase as early as next month, including some primary dealers, underscoring how much debate there is on and off the committee.
That was evident in a separate Reuters survey of bond strategists who clung to their long-held views of U.S. 10-year Treasury yields declining but said rates were more likely to come in above their forecasts than below them.
Stephen Stanley, chief U.S. economist at Santander U.S. Capital Markets, said “the FOMC’s debate next month will come down entirely to the inflation outlook,” adding he expects the core PCE deflator to be up by close to 3% annualized.
“Not good enough. So, as things currently stand, I still expect the FOMC to tighten next month,” he said.
Economists in the poll forecast PCE inflation to average 3.5% this year, unchanged from last month. They expect it to remain above the Fed’s target at least until 2028, poll medians showed.
Before the Fed meets in September it will receive the July Personal Consumption Expenditures data, its preferred inflation gauge, which was last measured at 3.7% in June, as well as the latest employment report.
High living costs remain a political vulnerability for President Donald Trump ahead of November’s midterm elections. Trump partly secured his 2024 election win on pledges to lower prices.
(Other stories from the Reuters global economic poll)
(Reporting by Indradip Ghosh; Polling by Mumal Rathore and Rhea Rose Abraham; Editing by Hari Kishan, Ross Finley and Toby Chopra)
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