The Fed’s Powell is due to speak as economists worry about a policy misstep and election risk.

By Howard Schneider

NASHVILLE, Tenn. (Reuters) – A mistake by the U.S. central bank in setting interest rates in the latest phase of the battle against inflation is the main risk that could undermine the economy next year, according to a new survey of economists released as the Federal Reserve Chair , Jerome Powell, was scheduled to speak on Monday.

Of the 32 professional forecasters recently surveyed by the National Association for Business Economics, 39% cited a “monetary policy mistake” as “the greatest downside risk to the U.S. economy over the next 12 months.” Conversely, 23% saw the outcome of the November 5 US presidential election as the biggest downside risk, and the same number cited an escalation of conflicts in Ukraine and the Middle East.

Responses to the survey, which was released on Sunday, show the intense focus on the Fed as it eases monetary policy, hoping both to keep inflation steadily falling to its 2 percent target and to avoid a further sharp rise in the unemployment rate. which has grown modestly for a year.

Powell is scheduled to address the association at 12:55 pm CDT (1755 GMT) in Nashville, Tennessee, and is expected to detail the Fed’s decision to cut its benchmark interest rate by half a percentage point at its meeting on 17-18 September. and on the considerations that will frame an expected series of reductions in borrowing costs for the rest of this year and into 2025.

The Fed is expected to cut rates again, by either a quarter or half a percentage point, at its Nov. 6-7 policy meeting.

Overall risks to the economy are rising, the association’s group of economists indicated, with 55% saying the economy is more likely to perform worse than expected than better – with Fed policy at the top of the list of possible slowdowns.

Currently, the median panel said U.S. economic growth is expected to slow to 1.8 percent next year from about 2.6 percent this year, with the jobless rate rising to 4.4 percent from the current 4.2%, and inflation ending in the future. year at 2.1%.

Two-thirds of respondents said they did not expect a recession until at least 2026.

‘JUST IN TIME’

Such results would likely be cheered by Powell and the Fed as a “soft landing” textbook. Inflation, as measured by the central bank’s preferred personal consumption price index, fell from a peak of more than 7 percent in 2022 to 2.2 percent last month, without a recession or a sharp rise in the unemployment rate. While the unemployment rate rose to 4.2 percent from last year’s half-century low of 3.4 percent, it remains well below the 5.7 percent average recorded in Bureau of Labor Statistics data from late the 1940s.

But there is broad disagreement over how to get the job done, highlighting concerns about the Fed’s ability to avoid either keeping borrowing costs and financial conditions too tight and unnecessarily slowing the economy, or loosening so quickly that inflation returns.

While the median of the panel’s forecasters said the current policy rate is where it should be following the Fed’s recent rate cut, opinion was roughly split on the issue — with most feeling the central bank is already on the right way.

The rate move came “just in time,” 65 percent of respondents said.

But only a third of them think the current policy rate is “just right”, while another third “think the rate should be lower than 4.75% and 30% think it should be 5% or higher,” the survey found.

Among other risks cited, respondents were divided on which election outcome posed the greater threat to the economy.

Keeping control of Congress and the White House in the hands of a single party can make it easier to make decisions on things like raising the debt ceiling or setting a budget, but it can also give the president more leeway to deliver on campaign promises like tax cuts. or trade policies.

As a downside risk, 13 percent said a Republican expansion of the White House and Congress would pose a threat, compared with 10 percent who felt that way about a Democratic expansion of the executive and legislative branches of government.

Conversely, 7 percent of respondents viewed a Democratic or Republican prospect in a positive light.

Divided governance was seen as a downside risk by 17% of respondents and an upside risk by 13%.