Fed to stick to 75 bps hike in July; 40% chance of recession

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The US Federal Reserve will opt for another 75 basis point rate hike rather than a larger move at its meeting next week to quell stubbornly-high inflation as the likelihood of a recession over the next year rises to 40 percent, a Reuters poll of economists found.

Inflation hit 9.1 percent in June, another four-decade high, stoking expectations the Fed, having only just shifted gears from 50 to 75 basis points at the last meeting, would act even more forcefully and go for a 100 basis point hike.

The July 14-20 Reuters poll found 98 of 102 economists expect the Fed to hike rates by 75 basis points at the end of the July 26-27 meeting to 2.25-2.50 percent. The remaining four said they expected a 100 basis point hike.

Over 90 percent - or 47 of 51 respondents - said any potential recession would either be mild or very mild. Only four said it would be severe.

A slowdown in growth, and hopefully with it, inflation, was likely to force the Fed to cut back on the size of rate hikes at future meetings, the poll found.

A strong majority expects the Fed to slow to 50 basis points in September and then raise by only 25 basis points at the November and December meetings. Those views remained largely unchanged from the last poll.

Over 80 percent of respondents, 82 of 102, saw the fed funds rate at 3.25-3.50 percent or higher by the end of this year. There was no change to where or when the Fed would stop raising rates, at 3.50-3.75 percent in Q1 2023, according to the median forecast.

Still, price pressures were expected to remain elevated and above the Fed's 2 percent target rate over the coming years. Inflation as measured by the Consumer Price Index was forecast to average 8 percent, 3.7 percent and 2.5 percent in 2022, 2023 and 2024 respectively.

The jobless rate was forecast to average 3.7% this year before picking up to 4 percent in 2023 and 4.1 percent in 2024. That is still low by historical comparison and far from the highs seen near the start of the pandemic-induced recession in 2020.

Economic growth forecasts, meanwhile, were downgraded across the board. After a surprise contraction in Q1 2022, growth for Q2 was penciled in at only a seasonally-adjusted annualized rate of 0.7 percent, down from the 3 percent predicted last month. Over one in five predicted another contraction.

GDP growth was slashed to 2 percent for this year from 2.6% forecast last month, and nearly halved to 1.2 percent for 2023 when the full effect of the Fed's rate hikes sets into the economy.