A Reuters survey of economists showed the Federal Reserve was still expected to lift interest rates again in December, even as confidence in the pace of future tightening weakened.
The poll, taken from Nov. 13-19, found the median view was for three more increases in 2019, but the risk had shifted toward fewer moves. Traders in U.S. short-term interest-rate futures were already pricing in only two hikes next year.
The same survey also showed a modest rise in recession concern. The median probability of a U.S. recession over the next two years moved up to 35 percent from 30 percent in the previous monthly poll, while the 12-month recession risk stayed at 15 percent.
Economists said the U.S. economy remained solid for now, helped by the tail end of the $1.5 trillion tax cut boost and a jobless rate near a half-century low. But they also warned that momentum was likely to fade as the effects of earlier rate increases, a stronger dollar and trade tensions with China continued to build.
James Knightley, chief international economist at ING, said: “The economy is facing a growing number of headwinds, including the lagged effects of previous interest rate rises and dollar strength, the uncertainty of trade protectionism at a time when external demand is slowing, and a sense that the support from the fiscal stimulus will gradually fade.”
He added: “The main risk to the upside likely stems from the tight jobs market and whether wages can continue rising, but... we look for economic growth to slow through 2019 and this should see inflation pressures gradually recede late next year.”
Growth was expected to cool sharply after a strong run in 2018. Economists forecast gross domestic product would expand at an annualized 2.7 percent in the fourth quarter, down from 4.2 percent in the second quarter and 3.5 percent in the third quarter.
For 2019, GDP was projected to slow to between 2.0 percent and 2.5 percent, before easing further to 1.8 percent by mid-2020. That would be about half the latest reported pace.
The trade fight launched by U.S. President Donald Trump against China was already weighing on export-sensitive economies such as Germany and Japan. An Asia-Pacific Economic Cooperation summit ended on Sunday without a final statement for the first time in the forum’s history, underscoring the strain in global trade relations.
That backdrop also reduced expectations that Trump and Chinese President Xi Jinping would secure a breakthrough when they met at a G20 summit later that month.
Wall Street’s recent sell-off had led some investors to expect a softer tone from the Fed at its November meeting, but the central bank did not change course. Economists in the poll unanimously said the Fed would raise the federal funds rate by 25 basis points to 2.25-2.50 percent in December.
Forecasts for 2019 remained split around the final move. The median view pointed to three increases next year, which would take the federal funds rate to 3.00-3.25 percent by the end of 2019, but only 54 of 102 economists expected that third hike.
The range of views was wide. One respondent saw no change in rates at all in 2019 after a December increase, while another expected a 50 basis point hike at the June meeting.
Inflation was one reason economists were not more convinced about a steeper tightening cycle. Wage inflation had picked up, but most respondents had not materially raised their inflation forecasts.
There was also little agreement on when the next downturn would arrive. Twelve respondents said the chance of a recession in the next two years was above 50 percent, but only Fathom Consulting put a point forecast on GDP contracting in full-year 2020.
On the political side, just over half of 65 economists said the November midterm elections had no effect on their growth outlook. In those elections, the Democratic Party won control of the House of Representatives while the Republican Party kept the Senate.
Twenty-seven respondents said the new balance of power was negative because it would make it harder for the White House to pass another sweeping tax cut like the one enacted late in 2017. Five said the outcome was positive.
Additional reporting by Indradip Ghosh and Polling by Mumal Rathore; Editing by Ross Finley and Chizu Nomiyama.
