Economists Say the Fed Is Almost Done Raising Interest Rates

The Federal Reserve will be finished with its current interest rate-raising cycle after just one more widely expected quarter-point hike next week, according to 106 economists polled by Reuters.

The survey findings are in line with Wall Street bets on 30-day Fed Futures.

According to the CME FedWatch Tool, traders on Wednesday morning were betting on a 99.8% probability of a quarter-point rate hike when the Fed meets July 25-26. The probability of more hikes drops precipitously after that – with the highest odds of another hike coming in November at less than 27%.

The Fed has raised its benchmark rate 10 times since March 2022 to fight inflation, to a 16-year high of 5% to 5.25%, and its efforts appear to be working. The Consumer Price Index fell to 3% in June from 4% in May. It had reached as high as 9.1% in June 2022.

Despite such progress on inflation, fewer economists are of the view that the Fed may begin lower rates in the quarters ahead, the Reuters poll showed. The share of economists who predicted at least one rate cut by the end of March next year fell to 55% to 78%.

Despite the Fed's efforts to slow the economy, its growth has remained relatively healthy and the labor market is at historically strong levels with the unemployment rate at 3.6%. So what remains of inflation may be sticky.

The central bank's preferred measure of inflation is the personal consumption expenditures index, last reported at 3.8% for May. Core PCE, which excludes food and energy prices, was at 4.6%, well above the Fed's 2% inflation target.

"We do not want to rush ahead and say the fight against inflation has been won, as we have seen head-fakes in the past," Jan Nevruzi, U.S. rates strategist at NatWest Markets, told Reuters.

The Fed has signaled that its key interest rate will peak at 5.5% to 5.75% in its "dot-plot" projections that reflect the views of its rate-setting Federal Open Market Committee. Only 19 of the 106 economists that Reuters polled predict the rate will reach that range.

Whether the Fed can slow the economy enough to tame inflation without tipping it into a recession remains an open question among economists. Of 41 economists asked about the possibility of a recession, 85% predicted it would come some time this year.