Fed likely to hold rates, hike again in December

Expectations for another U.S. interest rate increase in December have surged, with every economist in a Reuters poll now forecasting a hike even as the Federal Reserve is widely expected to leave rates unchanged this month.

All 100 respondents in the October 16-20 poll expect the Fed to raise rates in December, a sharp reversal from last month's survey, when fewer than half anticipated a hike.

For the Fed's October 27-28 meeting, 94 of 100 economists expect policymakers to keep the federal funds rate unchanged at 3.75 percent-4.00 percent, in line with market pricing.

The Federal Open Market Committee unanimously raised rates by 25 basis points in September.

Despite recent reports of a strong economy and hotter-than-expected inflation, Fed officials have signaled a slower approach to further rate increases. Fed Chair Kevin Warsh, who has made it clear he isn't keen on providing guidance, has remained silent.

"You have a strong economy, and you have inflation. There's really no reason for you to worry so much about getting interest rates higher; this is like the easiest choice," said Alex Pelle, senior U.S. economist at Mizuho Securities. "Unfortunately, the Fed is really not getting more on top of the issue; they're just treading water and perhaps even getting a little behind."

Expectations for how high rates will ultimately climb have also increased. Nearly 60 percent of economists polled expect the policy rate to peak at 4.00 percent-4.25 percent.

Another 38 of 92 respondents forecast at least two additional rate increases, up from about one-fifth in the September survey.

"The risks are in the direction of a Fed that ultimately needs to hike rates more than we expect," said Michael Gapen, chief U.S. economist at Morgan Stanley.

"If there are risks around the path for the economy and inflation, they do appear tilted to the upside."

Inflation has stayed above the Fed's two percent target for nearly six years. Poll medians showed the Personal Consumption Expenditures Price Index, the Fed's preferred inflation measure, remaining more than 100 basis points above the target over coming quarters and not returning to two percent until at least 2028.

Higher energy costs from the U.S.-Israeli war with Iran and new tariffs on imported goods are adding to price pressures, with oil prices holding above US$100.

The U.S. economy expanded at an annualized rate of 2.2% in the second quarter and is forecast to grow 3.2 percent in the third quarter. Growth is expected to slow to 2.2% in the October-December period.

On an annual basis, economists expect growth of 2.3% this year and 2.1% in 2027, both above the 2.0% pace the Fed considers non-inflationary.

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