Expect a 50-bp Bump in June, Fed to Lift Federal Funds Rate by 200 bps or Less and Unwind Balance Sheet to $7 Trillion

93% Agree the Fed Waited Too Long on Raising Rates, Leading to Increased Inflation

Washington, DC, June 6, 2022 – Today, SIFMA unveiled the results of its Economic Advisory Roundtable semiannual survey of the chief U.S. economists of 27 global and regional financial institutions.

“We are seeing clear signs of improvement, reaching that light at the end of what has been a very long and very painful tunnel. At the same time, many of last year’s risks still remain, complicating the outlook for the domestic recovery: policy risks, inflation risks, supply distortions, an ongoing labor supply shortage, and more recently international conflict and more aggressive monetary policy, just to name a few,” said Dr. Lindsey Piegza, Ph.D., chief economist and managing director at Stifel Financial Corporation and chair of SIFMA’s Economic Advisory Roundtable. “While we have seemingly made it past one crisis, another lurks around the corner as the Fed raises rates, potentially enough to stall consumers and businesses, and choke off domestic economic growth entirely.”

We highlight the following findings from the survey (populated between May 9 -23):

 

Economic Forecasts

• Regarding inflation, the Consumer Price Index (CPI) is expected at +6.3% for 2022.
• Unemployment rate is forecasted to end 2022 at +3.5% and remaining at +3.5% in 2023 (4Q average).
• 2022 GDP growth is expected at +1.5% (median forecast, 4Q/4Q); 2023 expected at +1.7%.
• 100% of economists expect a long-term potential GDP growth rate of 1.5-2%, with 73% stating this is unchanged from pre-COVID estimates.
• The main factors impacting economic growth include inflation, U.S. monetary policy, and tight labor market for both 2022 and 2023.
• Key risks to forecasts include:
  • Upside – Increase in consumer spending, resolution of geopolitical tensions, and supply chain recovery.
  • Downside – Monetary policy overcorrection, escalation of geopolitical tensions, and higher inflation.
• Roundtable economists are evenly split when it comes to expectation of the U.S. entering a recession. 18% of respondents each believe there will be no recession, recession will come in 2H22, 2H23, 2024, and beyond 2024.

Inflation Forecasts

• 2022 CPI – expectation +6.3% (2021 actual +6.7%) and 2022 Core CPI – expectation +5.0% (2021 actual +5.0%).
• 93% of respondents believe the Fed waited too long to raise rates, allowing inflation to get out of control.
• 93% of respondents believe we are at peak inflation levels (in terms of PCE).
• 33% of respondents expect inflation will begin to noticeably decline back down toward the Fed’s preferred 2% target by 1H24, followed by 27% replying 2H23.
• 64% of respondents expect a 15-25% probability the U.S. will experience structurally higher inflation over the longer run (defined as longer than three years from now), followed by 14% responding 0-15% and 25-50% each.
• 56% of respondents believe inflation is largely a supply driven problem and 44% demand driven.
• 50% of respondents expect supply chain disruptions to dissipate by 2H22, followed by 29% replying 1H23.
• With international conflict adding an additional layer of pressure to inflation, 47% of respondents expect relief from this pressure by 1H23, followed by 27% replying 2H23.
• 87% of respondents agree with the Fed that prices pressures have become more structural or broad-based.
• 67% of respondents are somewhat confident that the Fed can achieve its 2% inflation goal in a sustainable way, followed by 13% replying very confident and another 13% replying doubtful.
• Top factors in core inflation outlooks include: supply chain issues, monetary policy, and economic slack/unemployment.
• Top factors to push long-term inflation higher include: sustained breakdown of supply chains, stickiness of wage increases, and cost increases as supply chains move back to the U.S.
• 40% of respondents expect over 50% probability the U.S. will experience a period of disinflation in core measures over the next two years with another 33% responding between 0% and 15% probability.
• 53% of respondents believe the massive expansion of the government’s balance sheet (fiscal spending >$7 trillion) poses a significant upside risk to inflation.
• 80% of Roundtable economists see the greater long-term risk to the economy as stagflation, followed by 13% replying deflation.

Fed Actions

• All respondents expect the Fed to raise the target Federal Funds rate by 50 bps in June.
• 54% of respondents expect the Fed to raise the target Federal Funds rate by <200 bps by year end, followed by 38% expecting a 200 bps hike.
• 29% of respondents expect the peak target Federal Funds rate to be 250-300 bps, followed by 24% expecting 300-350 bps and 350-400 bps each.
• 59% of respondents expect the peak rate to be reached by end of 2023, followed by 24% responding end 2022.
• 87% of respondents expect the Fed will not need to accelerate the proposed pace of balance sheet reductions.
• All respondents expect the size of total balance sheet to be over $7 trillion by the end of 2022, and 69% expect it to stay over $7 trillion by the end of 2023.
• As to the efficiency of the Fed’s communication with markets around its timeline for monetary policy adjustments, 60% of respondents indicated it is excellent/very clear, while 40% said murky but decipherable.
• The factors listed as most important to the Fed’s decision making were: inflation due to supply chain issues, inflation due to tight labor market, and inflation due to Russia/Ukraine conflict.

Life after COVID

• 63% of respondents expect the labor force participation rate not to return to the approximately 63% pre-COVID average until beyond 2023, with another 25% responding never.
• Top factors leading to the labor supply gap include: the Great Retirement (69% of respondents) and childcare issues (50%).
• All respondents expect employees never to return to the office at pre-COVID levels, indicating hybrid work is here to stay.
• The key factors listed by respondents limiting a large-scale return to office include choose to continue working at home, not want to commute/time freed up from not commuting, and childcare issues.
• Despite the emergence of the latest B2 variant, 56% of Roundtable economists believe consumers are returning to pre-COVID behaviors because of fatigue/frustration with earlier COVID policies while 38% believe the vaccination rates/vaccine availability is the driver.

The full report can be found here.

The 2021 year-end survey report can be found here.

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The SIFMA Economic Advisory Roundtable brings together chief U.S. economists of 27 global and regional financial institutions. This semiannual survey compiles the median economic forecast of roundtable members, published prior to the upcoming Federal Open Market Committee (FOMC) meeting. We analyze economists’ expectations for: GDP, unemployment, inflation, interest rates, etc. We also review expectations for policy moves at the upcoming FOMC meeting and discuss key macroeconomic topics and how these factors impact monetary policy.

SIFMA is the leading trade association for broker-dealers, investment banks and asset managers operating in the U.S. and global capital markets. On behalf of our industry’s one million employees, we advocate on legislation, regulation and business policy affecting retail and institutional investors, equity and fixed income markets and related products and services. We serve as an industry coordinating body to promote fair and orderly markets, informed regulatory compliance, and efficient market operations and resiliency. We also provide a forum for industry policy and professional development.

SIFMA, with offices in New York and Washington, D.C., is the U.S. regional member of the Global Financial Markets Association (GFMA).

Related Resources

• SIFMA Research

  Mid-Year 2022 Economic Survey

• The SIFMA Podcast

  A Conversation with Dr. Lindsey Piegza, Ph.D.