Economists at PNC Bank and Comerica Inc. both expect the Federal Open Market Committee to begin raising interest rates next week.
In an economic briefing Thursday, PNC Economist Kurt Rankin wrote that he expects the committee on Wednesday to make the first of five quarter-point increases this year in the federal funds rate as inflation remains high with the economic fallout from Russia’s invasion of Ukraine.
“The urgency facing the Fed has been clear in the past few months’ worth of (Consumer Price Index) inflation releases, each eating further into 40-year highs not seen since the early 1980s,” Rankin wrote in the economic briefing, which noted the Consumer Price Index increased 7.9 percent in February, the highest increase since 1982.
“Geopolitical tensions will now compound ongoing supply chain and labor resource constraints through the foreseeable future and make taming CPI inflation a daunting task that nonetheless requires a delicate balance from the Federal Reserve’s monetary policy decisions so as to not drown consumer sentiment and spending momentum,” he wrote. “Inflation is entrenched across all consumer categories, and recent gains in oil prices, persistent home price appreciation and strong wage growth indicate that much of the same can be expected in the months ahead.”
An updated U.S. economic outlook that Comerica issued this week forecasts the CPI to run at a 7.6-percent increase for all of 2022, peaking at 7.9 percent in both the second and third quarters, followed by 4 percent in 2023.
Comerica Senior Economist Bill Adams expects the FOMC to raise the federal funds rate, now near zero, by a quarter percentage point next week and a full percentage point by the end of 2022. Adams wrote in an updated outlook that the Russia-Ukraine crisis is a “a body blow to the U.S. economy’s outlook for 2022 and 2023.”
“As the conflict roils foreign food and energy markets, U.S. prices are surging in sympathy. American grocery, utility, and gasoline bills will rise in coming months as these costs are passed on,” he wrote. “If the Russia-Ukraine crisis cools off later this year and oil and food prices come back down, inflation will likely slow to a more normal pace by late 2023.”
The high inflation rate will “force concrete changes to household budgets” and likely lower consumer spending, Adams said.
Despite the high inflation, the U.S. economy does have “big positives for the U.S. that should offset Russia-Ukraine and help the U.S. dodge a recession,” according to Adams. He cited a high number of job openings nationally if households want to seek a second income, low unemployment, and how consumers entered the year in “good financial shape” with more than $2 trillion dollars in excess savings accumulated in 2020 and 2021.
Auto manufacturing and sales also “will be a tailwind as supply-chain issues fade and pent-up demand for new vehicles stays strong,” Adams said. Auto sales are expected to grow from 15 million units in 2021 to 15.5 million units this year, and accelerate to 18 million units in 2023, according to his latest outlook.