Dive Brief:
- Inflation will probably outrun the Federal Reserve’s 2% goal into 2027 or later, according to results of a survey of economists by the National Association for Business Economics released Monday.
- Forty percent of survey respondents forecast a recession next year, NABE said, citing economic policy changes under the Trump administration.
- “The outlook for growth and inflation are expected to be most impacted by more aggressive trade and immigration policies,” Sarah Wolfe, senior economist and strategist at Morgan Stanley Asset Management, said in a statement. “Most respondents do not think we will reach the 2% inflation target until 2027 or beyond,” Wolfe said. “As a result, the Federal Reserve’s policy moves will remain restrictive for some time.
Dive Insight:
Traders in interest-rate futures increased the odds that policymakers this month will leave the federal funds rate unchanged to 93% from 86% a month ago, according to the CME FedWatch Tool. They see 53% odds that the Fed will wait until June before next easing the main interest rate from its current range between 4.25% and 4.5%.
The central bank cut the benchmark rate by a full percentage point between September and December.
Policymakers held borrowing costs steady during a January meeting, citing lack of clarity on the inflationary impact from changes to policies on immigration, tariffs, regulation and federal spending. Since then they have voiced caution about further easing.
“Policy is now modestly restrictive and meaningfully less restrictive than it was seven months ago,” St. Louis Fed President Alberto Musalem said Monday.
“I believe a patient approach now will help us as we seek maximum employment, price stability and a durable economic expansion,” he said in a speech.
Fed Chair Jerome Powell for several weeks has characterized progress in curbing inflation as bumpy, and predicted it will continue on an uneven path.
Policymakers received good news on Friday when the Bureau of Economic Analysis reported that their preferred gauge of price pressures — the core personal consumption expenditures price index excluding volatile food and energy prices — rose 0.3% in January and 2.6% on an annual basis, in line with forecasts.
At the same time, the economy has recently shown signs of weakness. Consumer spending fell 0.5% in January on a pullback in purchases of vehicles and other durable goods, the BEA said Friday, reflecting a slump in household confidence as tariffs pose a risk of higher inflation.
Also, data released last week showed that pending home sales fell to a record low in January, and jobless claims during the week ended Feb. 22 hit the highest level so far this year.
Recent data on weak consumer spending and business investment has prompted the Atlanta Fed to scrap its Feb. 19 forecast for a 2.3% annual rate of economic growth during the first quarter. It now expects the economy during Q1 to shrink 2.8%.
“While I continue to expect the economy to grow at a good pace in coming quarters, I would become concerned if we begin to see more evidence of a consumer pullback or a dampening of business confidence and investment plans,” Musalem said.
Nineteen percent of economists expect the economy to start shrinking during the second half of this year, an increase of 7 percentage points since in the previous NABE survey in August.
The NABE surveyed 151 of its members between Feb. 7 and Feb. 14.
