Economists See Steeper Fed Rate Path, Stronger Inflation

Fed

Economists this month nudged higher their forecasts for how much the Federal Reserve will raise short-term interest rates this year to keep inflation under control as the economy strengthens.

A Wall Street Journal survey this month found economists, on average, forecast the Fed’s benchmark federal-funds rate will end the year at 2.25%, up from 2.21% in the February survey and 2.17% in the January poll.

The survey respondents were roughly split into two camps, expecting the equivalent of either three or four quarter-percentage-point rate increases in 2018.

Economists also saw the equivalent of two rate increases in 2019.

Fed officials, in their December projections, penciled in three rate increases this year and two next year. They would release updated forecasts following their meeting March 20-21.

The policy makers raised the fed-funds rate in December to a range between 1.25% and 1.5% and are likely to vote next week to lift it by another quarter point.

All but one of the economists surveyed said they expected the Fed to move next week.

The respondents in recent months have steadily upped their inflation forecasts as the economy picks up steam.

The economy grew 2.5% in the fourth quarter from a year earlier, well above the postrecession annual average of 1.9%.

Economists in the latest survey saw annual inflation rising to 2.1% in the fourth quarter of 2018 and remaining relatively stable thereafter.

Consumer prices rose 1.7% in January from a year before, having undershot the Fed’s 2% target for much of the past five years, according to its preferred gauge.

“Solid growth and higher inflation will allow the Fed to normalize policy sooner than expected,” said Nathaniel Karp, chief U.S. economist at BBVA Compass.

Some Fed officials have said recently they might need to raise rates more than three times this year.

Boston Fed President Eric Rosengren said last week it might be appropriate for the Fed to move “a bit faster than the three one-quarter point increases envisioned for this year.” 

Fed Chairman Jerome Powell on Feb. 27 was asked by lawmakers what could cause the Fed to raise rates more than three times this year, and he responded with a robust economic assessment. “We’ve seen continuing strength in the labor market. We’ve seen some data that will, in my case, add some confidence to my view that inflation is moving up to target. We’ve also seen continued strength around the globe, and we’ve seen fiscal policy become more stimulative,” he said.

David Shulman, senior economist at UCLA Anderson Forecast, said investors are “underestimating the tightening cycle.”

Economists in March saw the unemployment rate settling at 4.3% in the long run, unchanged from the January survey. The February survey didn’t ask for long-run projections.

The respondents pegged longer-run inflation at 2.1% in the latest survey, up from 2% in January.

And the economists this month saw the fed-funds rate settling at around 3.03% over the long term, up from 2.85% in January.

The Journal surveyed 59 business, financial and academic economists March 9-13. Not every economist answered every question.

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