Fed expected to aggressively hike rates to 5%, triggering global recession: survey

Federal Reserve officials are expected to maintain their hawkish stance at next week’s policy-setting meeting where they are likely to approve another super-sized interest rate hike, paving the way for borrowing costs to climb above 5% by March 2023, according to a survey of Bloomberg economists.

The survey found that most respondents expect the Fed to raise rates by 75 basis points for a fourth straight meeting. The Federal Open Market Committee will announce their decision following a two-day meeting on Tuesday and Wednesday. A basis point is one hundredth of one percent.

The U.S. central bank will then approve a 50 basis point increase in December, followed by 25 basis point increases at the following two meetings in February and March, participants predicted. The rapid tightening of policy is likely to trigger a U.S and global recession, according to the survey.

“Inflation pressures remain intense and the Fed is set to hike by 75 basis points in November,” James Knightley, chief international economist at ING Groep, said in a survey response. “We are currently forecasting a more muted 50 basis-point hike in December given a weakening economic and market backdrop.”

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Traders are pricing in a more than 80% chance of another 75 basis point hike at the conclusion of the Fed’s two-day meeting next week, according to the CME Group’s FedWatch tool, which tracks trading. Only 18% think the Fed will go with a half-point hike instead. The Fed has taken no action to dissuade that expectation.

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Officials may also take steps to push rates even higher than they had expected as recently as September as elevated inflation persists despite higher interest rates. The U.S. central bank had projected a peak rate of 4.6% next year, but that could increase depending on forthcoming economic data.

The U.S. central bank has embarked on one of the fastest courses in history to raise borrowing costs and slow the economy. Officials approved a third straight 75 basis point rate hike in September, lifting the federal funds rate to a range of 3.0% to 3.25% — near restrictive levels — and showed no signs of slowing down as they try to crush runaway inflation.

A Labor Department report released earlier this month showed the consumer price index, a broad measure of the price for everyday goods including gasoline, groceries and rents, rose 0.4% in September from the previous month and 8.2% on an annual basis, far faster than experts anticipated.

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“We haven’t yet made meaningful progress on inflation,” Fed governor Christopher Waller said during a recent speech.

In an even more concerning development that suggests underlying inflationary pressures in the economy remain strong, core prices, which strip out the more volatile measurements of food and energy, climbed 0.6% in September from the previous month. From the same time last year, core prices jumped 6.6%, the fastest since 1982.

“CPI came in hot, which virtually guarantees the Fed will hike 75 basis points next month and at least 50 in December,” said Robert Frick, corporate economist with Navy Federal Credit Union. “And we need to brace for more bad news in October and November as rising oil prices are likely to swing again from reducing to increasing inflation.”