Elevated inflation will compel the Federal Reserve to raise
US interest rates at least twice by the end of 2023, according to a new poll of
leading academic economists for the Financial Times.
The inaugural survey conducted by the FT and the Initiative
on Global Markets at the University of Chicago’s Booth School of Business
points to a potentially more hawkish path for monetary policy than indicated by
the Fed’s chair, Jay Powell.
The economists’ views align closely with the “dot plot” of
Fed officials’ own forecasts for when and how quickly rates will have to rise
from their current level near zero, as the US economy rebounds from the
pandemic and inflation runs ahead of the long-term average targeted by the Fed.
Publication of the latest dot plot sent a jolt through
markets earlier this month, as policymakers moved up their timing for expected
lift-off, but Powell and other members of the Fed leadership intervened later
to insist they would be patient in keeping monetary policy highly
The FT-IGM US Macroeconomists Survey polled 52 academic
economists on the likelihood that the Fed’s main policy rate would indeed be
higher by 0.50 percentage points by the end of 2023, as the dot plot indicated.
A majority said the likelihood of a move of that size or greater was above 75
per cent, and a large minority put it as high as 90 per cent.
Three economists said it was a certainty.
The survey underscores the challenge facing the central bank
to convey a clear message about its evolving monetary policy stance. Powell
warned that dot plot forecasts of future rate increases should be taken with “a
grain of salt”, but other officials have begun to float earlier timelines for the
first rate increases.
“As inflation goes up and the economy improves, the
traditional hawk-dove differences across the Federal Open Market Committee are
going to start to reappear,” said Alan Blinder of Princeton University, who was
a vice-chair of the Fed in the 1990s and participated in the survey. “You are
seeing it now, and you are going to see more of it.”
Blinder said he forecast an interest rate increase as early
FT-IGM survey respondents see inflation as the biggest
driver of Fed officials’ changing thinking on the timing of rate rises, citing
it as the main factor more frequently than the improving outlook for the US
jobs market or rising house prices.
Consumer prices have surged this year beyond even some of
the loftiest estimates. Core PCE, the inflation measure targeted by the Fed,
was running at an annual rate of 3.4 per cent in May, its highest in 29 years,
as strong demand for goods and services in the improving economy collided with
widespread supply chain constraints.
The FT-IGM survey, which ran between June 25 and June 28 and
will be conducted regularly throughout the year, shows that economists are
highly attuned to the risk of elevated inflation. Survey respondents’ median
forecast for core PCE at the end of this year was 3 per cent — the same
prediction as the median Fed official.
But two-thirds of the respondents said it was “somewhat” or
“very” likely this metric would still exceed 2 per cent on a year-over-year
basis by the end of 2022. The median forecast of Fed officials is for 2.1 per
cent at the end of next year.
“It is hard to think of a more pro-inflation environment,”
said Nicholas Bloom, an economist at Stanford University, who participated in
the survey. “The Fed has been as aggressive as it can be in promoting growth,
fiscal policy is incredibly relaxed and there are supply constraints.”
Despite the “perfect storm” that Bloom said has formed to
push consumer prices higher, he dismissed concerns that inflationary pressures
would get out of hand in the long-run, not least because the Fed is on hand to
Three-quarters of the FT-IGM survey respondents said it was
unlikely market expectations for long-term inflation would rise significantly
to over 3 per cent by the start of next year. Expectations are currently for
long-term inflation of 2.3 per cent.
“An essential part of the Fed maintaining their credibility
is being responsive to the incoming data,” said another respondent, Karen Dynan
of Harvard University.
The central bank has already begun discussing when it will
begin scaling back its $120bn monthly asset purchase programme, which officials
have pledged to maintain until they achieve “substantial further progress” on
their goals of 2 per cent average inflation and full employment.
The FTIGM survey showed substantial disagreement about the
outlook for economic growth in 2021, even with almost half the year in the
The median forecast was for a gross domestic product rebound
of 6.5 per cent, after the economy contracted 3.5 per cent last year. But the
economists were also asked to set out a plausible range of outcomes, and these
more often skewed to the downside than the upside.
The high degree of variation suggests “there is considerable
uncertainty about how fast service sectors will bounce back, whether labour
market shortages will hamper growth and how savings [and] consumption will
respond once fiscal stimulus is dialled down”, said Allan Timmermann, a
professor at University of California at San Diego, who helped design the
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