by Indradip Ghosh

BANGALORE, India (Reuters) – The Federal Reserve will keep the Fed funds rate target at its current range for the rest of the year, despite an expected recession, a Reuters survey of economists showed on Wednesday. are also worried about a possible default of payment by the United States.

These concerns and the failures of some regional US banks have led markets to bet on a rate cut of at least 50 basis points by the end of 2023, expectations which have strengthened after the last meeting of the Fed, which left the door open for a break.

US central bankers have since argued, however, that rates will remain high or may even be raised, not lowered, in the face of inflation.

More than 60% of economists polled May 11-16 (75 out of 116) expect the Fed’s monetary policy committee to leave the fed funds rate target between 5% and 5.25% until the end of the year.

This range could be raised within the year, according to 14 economists. Thirty others do not foresee a rise and at least a fall.

“Inflation is more than twice the Fed’s target and the unemployment rate is below the natural rate estimated by all FOMC participants. These facts alone suggest that the Fed should favor a hike rather than a rate cut,” said Michael Gapen, chief economist at Bank of America.

“In our view, rather than oppose a mild recession, the Fed would see it as an acceptable sacrifice to get inflation back on target.”

Thirty-four of 46 respondents predict a recession in the United States this year.

FEAR OF NON-PAYMENT

The Commerce Department announced a GDP increase of 1.1% over the first three months of the year as a first estimate. The consensus of economists gives growth of 0.6% for the current quarter, then a contraction of the economy of 0.2% and 0.3% for the last two quarters of the year.

According to the median of the responses, inflation is not expected to reach the 2% target until at least 2025 and unemployment is expected to increase from 3.4% currently to 4.2% at the end of 2023, then to 4.5% in 2024, which remains historically low compared to previous recessions.

However, the deadlock on raising the debt ceiling – set at $31.4 trillion – could jeopardize the prospect of a modest slowdown in the economy.

President Joe Biden and the main leaders of Congress have about two weeks to find an agreement, the Treasury estimating that the United States could then find themselves in a situation of default on June 1.

Previous crises of this kind have usually resulted in last-minute compromises, but in 2011 the United States’ credit rating was downgraded for the first time by a major rating agency, in this case Standard & Poor’s .

Of 41 economists surveyed, 22 believe the risk of a default is higher this time than in the past. Sixteen people said the risk was the same and three said it was lower.

According to another Reuters survey, concerns over this thorny issue will drive government bond yields higher in the coming weeks.

(Indradip Ghosh and Prerana Bhat, with Aditi Verma and Maneesh Kumar, Laetitia Volga, edited by Jean-Stéphane Brosse)

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