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Federal Reserve remains detained until 2023: CNBC investigation



Federal Reserve Chairman Jerome H. Powell during a speech on March 3, 2020 in Washington, DC.

Mark Makela / Getty Images

In the first CNBC Fed Survey, since the Federal Reserve announced its new, more dove monetary policy strategy, respondents now predicted no rate hikes by the central bank until 2023.

The results are a potential first sign that the Fed̵

7;s new strategy of letting inflation run above its 2% target for an unspecified period of time has had an immediate impact on the interest rate outlook.

The new average forecast, which the Fed has withheld until February 2023, is six months later than the July survey and comes amid more optimistic views on the economic recovery and higher inflation forecasts. Under the previous strategy, where the Fed was aiming for a symmetrical 2% target, these conditions could have brought the prospect of interest rate hikes forward.

“The Fed’s adoption of flexible average inflation targeting gives (it) a significant estimate to tolerate an inflation overrun, and interest rates will remain at the effective lower limit for several years,” said John Ryding, financial economics adviser at Brean Capital.

The central bank begins a two-day policy meeting on Tuesday.

A large majority of the 37 respondents, which include economists, fund managers and strategists, believe the Fed will sit tight if inflation moves above the 2% target. Forty-eight percent said the Fed will tolerate inflation above the target for six months to a year without migration, and 41% believe the Fed will adhere to higher inflation for a year or longer.

How high?

CNBC specifically asked how high inflation could average in a six-month period before the Fed wandered. The mean response was 3.2%.

While the CNBC data is among the first to place actual figures in the Fed’s new policy, respondents said they wanted the central bank to do so explicitly.

“Low unemployment has been discarded as an inflation driver, but we do not know what sins we will now see … neither how long nor how much overrun will be tolerated,” said Lynn Reaser, chief economist at Point Loma Nazarene University.

Several respondents were concerned that inflation could be a problem faster than the Fed expects. Eighty-five percent now see the actions of Congress and the Fed to combat the economic effects of the virus as inflationary, up from 44% in the July survey.

“Has everyone forgotten that economic policies have long delays and the impact of policies already in place this year is likely to have a significant positive impact in 2021?” Said Jim Paulsen, chief investment strategist at Leuthold Group. “It’s time for political officials to step down and breathe.”

Peter Boockvar, chief investment officer at Bleakley Advisory Group, added: “There’s still so much talk about what more the Fed could do. Instead, I’ll start hearing / seeing them think about reversing this extraordinary policy when we get an effective vaccine that may well come in the next few months. “

Recession already over?

In general, economists increased their prospects for the economy. Just over half believe the current recession is over, and on average ended in May. Of the 47% who think it is not over, they predict, on average, that it will be over in April.

Forecasts generally improved, and GDP is now expected to fall 2.6% this year, up from a 4.5% decline expected in July. The outlook for the unemployment rate also improved several points, and forecasters see the consumer price index, which ended the year at 1.4%, up more than one percentage point from the July survey.

Overall, 69% of respondents say that the recovery is going faster than they originally predicted.

“The economy has come a lot faster and faster than one would expect back in the spring,” said Stephen Stanley, chief economist at Amherst Pierpont Securities. “Real GDP growth, inflation and unemployment are all ahead of schedule.”

But there are significant risks to the forecast. Fifty-three percent of respondents believe there is a chance of a new wave of the virus in the fall and winter, only 5 points lower than in the July survey.


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