U.S. Federal Reserve seen raising rates once more as inflation risks persist

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Fed to raise rates on inflation

Highlights

All 101 economists in the November 6-10 Reuters poll expect the U.S. Federal Reserve to raise rates by 25 basis points in December to 4.00%-4.25%, citing persistent inflation and robust growth.
The Fed's preferred PCE inflation measure is projected to average 3.5% in 2023 and 2.6% in 2024, remaining above the 2% target until at least 2028.
U.S. GDP is forecast to grow 2.2% in Q4 and 2.4% in 2023, buoyed by AI-driven investment despite potential slowing as higher rates impact capital spending.

December hike outlook and inflation path

As reported by Reuters, all 101 economists in its November 6-10 poll expect the U.S. Federal Reserve to raise the federal funds rate by 25 basis points in December, taking it to a 4.00%-4.25% range after a September increase and an October pause.

A strong jobs market, durable economic growth and inflation that remains above the Fed's target for nearly six years support the case for further tightening. Tom Porcelli, chief economist at Wells Fargo, says the Fed is dependent on incoming inflation data and that another rate increase is still warranted, adding there was a credible case for a move at the October meeting.

About 55% of forecasters, or 56 of 101, expect the December move to mark the end of the current tightening cycle. But 45 economists, including more than half of the primary dealers surveyed, still expect at least two more increases, in line with market pricing.

Fed officials are not fully aligned on the inflation threat. Governor Christopher Waller says the Fed should raise rates in December even if inflation cools and consider a larger move if price pressures accelerate, while Richmond Fed President Tom Barkin says policy should be adjusted only with care.

The October Consumer Price Index, due later on Tuesday, is expected to show inflation picking up, according to a separate Reuters survey. Jan Groen, chief U.S. economist at Societe Generale, says he does not see meaningful softening in inflation ahead and expects a notable re-acceleration in core inflation through winter and the first quarter of next year.

Growth resilience and market implications

The Fed's preferred inflation measure, the Personal Consumption Expenditures Price Index, is expected to stay more than one percentage point above 2% over coming quarters and not return to target until at least 2028, based on poll medians. The gauge is forecast to average 3.5% this year and 2.6% next year, both slightly above last month's projections.

If the consensus view is correct, the current cycle would end after just two rate increases, making it the shortest Fed hiking campaign in more than a decade. Still, economists say the risks to their medium-term inflation outlook have largely not changed since the midterm elections, despite a political shift in Congress and a sharp fall in oil futures from late-October highs on hopes for a resolution to the nearly nine-month-old Middle East conflict.

The U.S. economy is expected to grow 2.2% this quarter after expanding at a 3.4% annualized pace in the third quarter, with AI-driven investment providing much of the support. On an annual basis, growth is forecast at 2.4% this year and 2.2% in 2027, both slightly upgraded from last month's estimates.

A majority of economists who answered an additional question say their view on AI capital spending has not changed since the midterm elections. Groen says AI-related business investment is likely to slow under higher interest rates, but not abruptly, in part because more of the buildout is being financed through corporate bond issuance.

As highlighted earlier, UBS rate-hike outlook projected the Fed could extend tightening into 2027 amid persistent inflation pressures.

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