Fed to hike in Q4 next year; inflation to remain above target until 2024: Reuters poll

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The Federal Reserve building is set against a blue sky in Washington, U.S., May 1, 2020. REUTERS/Kevin Lamarque

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BENGALURU, Nov 19 (Reuters) - The Federal Reserve will raise interest rates late next year, earlier than expected just a month ago, in a landmark shift from the emergency measures it took to backstop the U.S. economy during the COVID-19 pandemic, according to a Reuters poll.

Most respondents said the Fed should move even sooner to combat inflation, which hit a 30-year high last month and economists say it will stick above the central bank's target until at least 2024.

The shift in economists' expectations for a first rate hike to next year from early 2023 predicted in an October survey puts them more in line with market expectations, and follows recent news U.S. inflation hit a 30-year high last month.

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With disrupted global supply chains and a sharply-improved job market, the Fed, like most major central banks, is expected to move sooner rather than later.

The Nov. 15-18 poll predicted the Fed would raise rates by 25 basis points to 0.25-0.50% in Q4 2022, followed by two more hikes in Q1 and Q2 2023. The fed funds rate was expected to reach 1.25-1.50% by the end of 2023.

But nearly two-thirds of economists, 27 of 42, who responded to an additional question on what they recommended the Fed ought to do said the Fed should raise rates earlier, by the end of September next year.

"The double-whammy of a cost and wage push into prices is likely leaving the Fed uncomfortable. The risks of earlier hikes - next summer, if not before - are on the rise," said Michelle Meyer, U.S. economist at Bank of America Securities.

"To the extent that inflation expectations march higher over the longer run and consumers continue to react negatively to higher prices on the view that they will prove persistent, the more likely the Fed will damper the inflationary pressure with tighter monetary policy."

Reuters Poll: U.S. monetary policy outlook

High inflation is a concern for central banks around the world, some of which have already raised rates or are close to doing so. The Fed, for its part, is expected to taper its $120 billion in monthly bond purchases from this month.

The consensus view for change in the core personal consumption expenditures (PCE) price index, the Fed's key inflation gauge, was predicted to stay above 4% this quarter and next, double the 2% target. It's then forecast to slow in the second half of 2022, along with growth.

Those forecasts were upgraded from last month.

"The whiff of stagflation is getting stronger as shortages worsen, leading to surging prices and weaker real GDP growth. Shortages of goods and intermediate inputs will eventually ease, although not for at least six to 12 months," said Paul Ashworth, chief North America economist at Capital Economics.

"But the drop in the labour force appears to be more permanent, which suggests the pandemic could have a long-term scarring effect on potential GDP after all."

After expanding 6.7% in the second quarter on an annualized basis, U.S. economic growth was expected to have slowed to 2.0% in the third quarter before expanding 4.8% this quarter. That compared with 3.8% and 5.0% predicted in October for the third and fourth quarters, respectively.

On average, the economy was expected to grow 3.9% next year, 2.6% in 2023 and 2.3% in 2024. That compared with previous forecasts of 4.0% for 2022, 2.5% for 2023 and 2.2% in 2024.

While the unemployment rate was predicted to range between 3.6% and 4.3% until the end of 2023, over 55% of 39 respondents who answered another question said consumer spending in the U.S. would improve over the coming year.

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Reporting by Shrutee Sarkar; Polling by Prerana Bhat and Arsh Mogre; Editing by Ross Finley and Nick Zieminski

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