Fed Seen Hiking Rates Aggressively to 5 Percent, Sparking a Recession: Bloomberg Survey

Federal Reserve Board Chairman Jerome Powell speaks at a news conference in Washington, on Sept. 21, 2022. Saul Loeb/AFP via Getty Images

The U.S. Federal Reserve is expected to maintain its hawkish stance on interest rates during the upcoming meeting in November, according to a group of economists surveyed by Bloomberg.

The policy-making arm of the Fed, the Federal Open Market Committee (FOMC), is scheduled to meet on Nov. 2. The survey found that economists expect the FOMC to hike rates by 75 basis points for the fourth consecutive time. In December, the committee might raise rates by an additional 50 basis points, the survey found. For the subsequent two meetings, economists expect 25 basis-point hikes each.

The economists also see the Fed potentially overtightening the rates. They feel there is a greater risk of the Fed raising rates too much and causing unnecessary pain rather than not raising the rates enough to bring down inflation.

“Monetary-policy lags are still underestimated,” said Thomas Costerg, senior U.S. economist at Pictet Wealth Management, according to Bloomberg. “The full effect of current tightening may not be felt until mid-2023. By then, it could be too late. The risk of a policy mistake is high.”

At the beginning of the year, the Fed’s benchmark interest rate was just 0.25 percent. By the time of its meeting in September, the central bank had raised it to a range of 3.0–3.25 percent.

Fed forecasts from the meeting projected rates to reach 4.4 percent this year and 4.6 percent in 2023, before going down in 2024.

Among the surveyed economists, three-quarters see a recession in the United States as likely over the next couple of years. Most of the remaining economists expect a hard landing, with a period of negative or zero growth. Two-thirds believe a global recession will likely occur within the next two years.

Fed Policy

While speaking during a recent investor conference in Riyadh, Saudi Arabia, Goldman Sachs CEO David Solomon said that he is expecting economic conditions to “tighten meaningfully” and that the Fed needs to see changes in the economy before easing.

“If they don’t see real changes—labor is still very, very tight—they’re obviously just playing with the demand side by tightening. But if they don’t see real changes in behavior, my guess is they’ll go further,” Solomon said.

During an interview with CNBC in late September, Jeremy Siegel, a professor of finance at the Wharton School, said that the Fed is “talking way too tough” and is focusing too much on lagged inflation. He believes the Fed should instead focus on preventing recession.

Siegel also dismissed the notion that higher wages were contributing to inflation. Instead, wages are playing “catch up” with the rising inflation, he pointed out. The professor also wants Fed Chair Jerome Powell to issue a public apology for the “poor monetary policy” the agency has implemented in recent years.

“It seems to me wrong for Powell to say we’re going to crush wage increases, we’re going to crush the worker, when that is not the cause of the inflation. The cause of the inflation was excessive monetary accommodation for the last two years,” Siegel said.