Economists in a Reuters poll predict that the U.S. Federal Reserve will implement a final 25-basis-point interest rate hike in May before holding rates steady throughout 2023. The poll also revealed a likely short and shallow recession this year.

Market Expectations: Rate Cut Less Likely

Concerns over economic downturn and banking sector stress led markets to price in a minimum 25-basis-point cut by the end of 2023. However, with inflation running well over the Fed’s 2% target, a strong labor market, and a significant easing in banking sector stress in recent weeks, a rate cut appears less probable than higher rates.

May Interest Rate Hike and Steady Rates for 2023

Of the 105 economists who participated in the Reuters poll, 94 (nearly 90%) predicted a 25 basis point hike in the Fed’s key policy rate at the May 2-3 meeting. For the rest of 2023, 59 out of 100 economists anticipated the Fed to maintain its policy rate.

Inflation, Labor Market, and Recession

Inflation is not expected to fall to the central bank’s target until at least 2025. The unemployment rate is predicted to increase to 4.3% by the end of 2023 and average 4.5% in 2024, remaining historically low compared to previous recessions. The Reuters poll also found a median 70% probability of a U.S. recession within the next two years, with growth forecasts at 1.1% and 0.8% for this year and 2024, respectively.