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Economists Predict Extended Highs in Interest Rates Amidst Uncertainty

In a recent survey conducted by Bloomberg, economists have voiced their expectations regarding the Federal Reserve’s stance on interest rates. The focus keyword of this report is “economists,” and the survey reveals that a majority of these experts anticipate the Federal Open Market Committee (FOMC) to maintain peak interest rates longer than previously anticipated.

Economists Expect Rate Stability

During its forthcoming meeting on September 19-20, the FOMC is widely expected to keep interest rates within the 5.25% to 5.5% range. This decision is in line with the predictions made by most economists who participated in the survey. Furthermore, these experts foresee this rate regime continuing until May, with the possibility of rate reductions afterward.

Additional Rate Increase in Question

While policymakers are also projected to announce an additional rate increase later this year as part of their quarterly economic projections, the survey respondents are skeptical about the Fed’s commitment to this move. They believe that the Fed might ultimately decide against another rate hike.

Powell’s Insights and Dilemma

Federal Reserve Chair, Jerome Powell, has hinted that the central bank might abstain from a rate increase in September. Powell’s rationale is to allow policymakers sufficient time to assess the broader economic ramifications of the 11 consecutive rate hikes that have taken place. Several central bank officials have echoed this sentiment, emphasizing the need to comprehensively evaluate the impact of tighter monetary policy on the economy.

However, Powell also indicated during the annual central bank gathering in Jackson Hole that inflation remains a concern, which could warrant additional rate increases. He remarked, “Although inflation has moved down from its peak — a welcome development — it remains too high. We are prepared to raise rates further if appropriate, and intend to hold policy at a restrictive level until we are confident that inflation is moving sustainably down toward our objective.”

Intensive Rate Hikes

Over the past year, policymakers have aggressively raised interest rates, approving 11 rate hikes in an effort to combat inflation and temper economic growth. In just 16 months, interest rates have surged from near-zero levels to over 5%, marking the most rapid pace of tightening since the 1980s.

The impact of these hikes has been felt in the form of higher interest rates on consumer and business loans, prompting businesses to scale back spending and leading to a slowdown in economic activity. Notably, the average rate on 30-year mortgages has soared above 7%, a level not seen in years. Borrowing costs for various financial products, from home equity lines of credit to auto loans and credit cards, have also witnessed significant increases.

Resilience Amidst Challenges

Remarkably, the economy has displayed resilience in the face of these higher interest rates. Employers continue to add jobs at a healthy pace, consumers maintain their spending habits at retail stores, and inflation has accelerated for a second consecutive month in August.

Future Uncertainty

Joel Naroff, president of Naroff Economics, highlights the lingering uncertainty, stating, “The most interesting element could be views on future rate hikes. What we don’t have any idea about is what fed funds level is considered to be too high.”

Inflation has receded from its peak of 9.1%, yet it remains significantly above the pre-pandemic average and well beyond the Fed’s target rate of 2%.

In conclusion, the consensus among economists suggests that while the Federal Reserve may entertain the idea of additional rate hikes, there is an overarching sense of caution and a need to carefully observe the economic landscape before committing to further tightening measures.

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