By Indradip Ghosh
BENGALURU, Nov 10 (Reuters) – The US Federal Reserve will hike interest rates for a second and final time in the current cycle in December, according to a majority of economists polled by Reuters who said the risks to their inflation outlook had not changed since the midterm elections.
Voters focused on the rising cost of living, fueled by Republican President Donald Trump’s trade tariffs and higher energy costs from the war with Iran, handed solid majorities in both houses of Congress to the Democratic Party.
However, the political shift is unlikely to bring rapid relief from inflation, even after oil futures tumbled more than 22% from their late-October high on hopes of a resolution to the nearly 9-month-old Middle East conflict.
A strong jobs market, resilient economic growth and inflation stuck above the Fed’s 2% target for nearly six years all suggest further tightening is required.
The central bank raised the federal funds rate in September but paused in October. It is forecast to hike one more time by 25 basis points in December to a 4.00%-4.25% range, unchanged from last month’s survey, according to all 101 economists in the November 6-10 Reuters poll.
“The Fed is at the mercy of incoming inflation data and it will lend itself to the Fed raising rates once more,” said Tom Porcelli, chief economist at Wells Fargo. “There was a fair argument that the Fed could have easily raised rates at this October meeting.”
Around 55% of forecasters, 56 of 101, expect December’s move to mark the end of the current cycle, also broadly steady compared with last month.
A strong minority, 45, including more than half of the primary dealers surveyed, still see at least two more increases ahead, in line with market pricing.
If the consensus view proves correct, just two rate rises would be the shortest Fed rate-hiking campaign in more than a decade.
A majority of economists who answered an additional question, 29 of 37, also said the risk to their medium-term inflation views had not changed since last week’s midterm elections.
There are differences of opinion among policymakers on the severity of the inflation threat.
Fed Governor Christopher Waller said early on Tuesday that the Fed should raise rates in December even if inflation cools and consider a bigger move if it accelerates, while a day earlier Richmond Fed President Tom Barkin said monetary policy should be moved only “with care.”
Both headline consumer prices and the core reading – which strips out food and energy – increased more than expected in October, the Labor Department’s Bureau of Labor Statistics said on Tuesday.
“I don’t think any softening in inflation is in the pipeline, to be honest. For me, the scenario is still of a meaningful re-acceleration in core inflation into the fall of the winter and Q1 of next year,” said Jan Groen, chief US economist at Societe Generale before the CPI data were released.
The Personal Consumption Expenditures (PCE) Price Index, the Fed’s preferred inflation gauge, will remain more than a percentage point above 2% over coming quarters and not return to target until at least 2028, poll medians showed.
It is expected to average 3.5% and 2.6% this year and next, respectively, slightly higher than forecast last month.
The economy is expected to grow 2.2% this quarter after expanding at a 3.4% annualized pace in the third quarter, powered largely by AI-driven investment. On an annual basis, growth is forecast at 2.4% this year and 2.2% in 2027, slight upgrades from last month’s forecasts.
A majority of economists, 27 of 41, said their view on AI capital spending had not changed since the midterm elections.
“I don’t think we’re going to see a sudden big hit next year in terms of AI related business investment spending. It’s definitely going to slow, I think, just because of higher interest rates. A lot of the AI buildout is more and more financed through corporate bond issuance,” added Societe Generale’s Groen.
(Other stories from the Reuters global economic poll)
(Reporting by Indradip Ghosh; Polling by Nushaiba Iqbal and Shaloo Shrivastava; Editing by Ross Finley and Kirsten Donovan)
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