Fed to stay the course with 25 basis point rate hike on March 22

By Prerana Bhat and Indradip Ghosh

BENGALURU, India, March 17 (Reuters) – The U.S. Federal Reserve will raise interest rates by 25 basis points on March 22 despite recent turmoil in the banking sector, according to a strong majority of economists polled by Reuters, who were divided on the risks to their vision of the types of terminals.

Market bets for the next meeting have been on a roller coaster ride, going from expecting a 50 basis point move after testimony from Fed Chairman Jerome Powell last week to pausing at some point. given after the failure of some regional banks.

Yields on two-year U.S. Treasuries, which generally reflect short-term interest rate expectations, fell more than 80 basis points this week after the collapse of Silicon Valley Bank, the largest bank failure since the 2018 financial crisis.

However, Reuters forecasts for the March meeting were flat on last month. Seventy-six of 82 economists forecast a quarter-point hike, in line with interest rate futures, which would put the Fed’s benchmark interest rate in a range of 4.75% at 5.00%.

A decision that will follow that of the European Central Bank on Thursday, which announced an increase of 50 basis points, giving priority to the fight against inflation.

Only five respondents to the Fed’s latest survey expected a pause, including four primary traders, and only one bank, Nomura, expected a 25 basis point cut.

“Last week’s financial turmoil will make the Federal Reserve reluctant to raise rates further,” said Bill Adams, chief economist at Comerica Bank.

“But Fed policymakers have repeatedly said they are more concerned about raising rates too low than raising rates too much,” he added. “A break in March is possible, but they are more likely to go higher before they risk erring on too much restraint.”

While some of the respondents were hesitant to offer a rate outlook beyond March, 56 of 64 economists said there would be at least another 25 basis point hike in the second quarter, taking the fed funds rate to a high of 5.00% -5.25. %, in line with the previous survey.

On a further question, respondents were split on the risks to their final interest rate forecast, with a slight majority, 12 out of 23, saying the maximum rate could be lower than forecast.

Significant majorities in previous polls have said the risks lean towards a higher terminal rate.

“We see considerable uncertainty about the Fed’s path in March and beyond,” said David Mericle, chief U.S. economist at Goldman Sachs, one of the few to expect a pause in March. “It’s hard to be overconfident right now.”

However, Mericle expects further increases, with the highest rate between 5.25% and 5.50% in the third quarter, above the survey median.

The survey shows an average probability of a recession of 65% in the United States over the next two years and predicts growth of only 1.0% this year and next.

Most economists are still of the view that the Federal Open Market Committee (FOMC) will stick to its “higher for longer” mantra and hold interest rates at least for the rest of the year. year.

Only eight of the 63 respondents who weighed in on the end-2023 outlook downgraded their forecasts, in line with market expectations.

“If the FOMC abandons its mission to eradicate inflation from the system now, it will lose its credibility as an inflation fighter and long-term inflation expectations may become unanchored,” said Philip Marey. , chief US strategist at Rabobank.

(Reporting by Prerana Bhat and Indradip Ghosh; Editing in Spanish by Javier López de Lérida)