THE U.S. Federal Reserve will kick off its tightening cycle in March with a 25-basis-point interest rate rise, a Reuters poll of economists found, but a growing minority say it will opt for a more aggressive half-point move to tamp down inflation. While inflation is rising across the globe, it is particularly hot in the United States, hitting a 40-year high last month. That is putting pressure on the Fed to not only raise rates from a record low but also to reduce its nearly US$9 trillion balance sheet, drastically inflated by emergency bond purchases as the Fed resuscitated the economy from COVID-19 pandemic damage. Now that the economy has recovered its pre-pandemic level, all 84 respondents in a Reuters poll taken Feb. 7-15 expected the Fed to raise the federal funds rate by at least 25 basis points at its upcoming March 15-16 meeting. Almost a quarter of those respondents, 20, forecast a 50-basis-point move to 0.50-0.75 percent following debate in markets over the past week after Fed officials discussed the merits of such a move. Rate futures are pricing in more than a 50 percent likelihood of a half-point hike. Rates were forecast to rise each quarter this year to reach 1.25-1.50 percent by end-December, roughly where they were at the start of the pandemic two years ago. One-quarter of respondents, 21 of 84, saw rates even higher by end-2022. “The risk is that at some point ... they’ll shift to hiking 50 basis points, because it’s very unusual for a central bank to have a zero interest rate in the face of the kind of news we’re looking at right now,” said Ethan Harris, head of global economics research at Bank of America Securities, referring to inflation. “I do think the Fed is behind the curve. In my view, the Fed should have started hiking last fall, and so they’ve got some catching up to do.” The Fed was also expected to start reducing its balance sheet quicker than in the previous cycle, beginning as soon as June or July, only a few months after the first rate hike. The poll concluded the Fed would start by cutting US$60 billion per month from its portfolio with predictions in a US$20 billion to US$100 billion range, according to the median of 27 responses to an additional question. That follows a US$120 billion-per-month purchase pace at the peak of pandemic-related stimulus. Respondents estimated the Fed’s balance sheet would amount to US$5.5 trillion to US$6.5 trillion once this so-called “quantitative tightening” concludes. (SD-Agencies) | 