KEY POINTS

  • Respondents said inflation would have to go as high as 3.2% for a six-month span before the Fed boosted rates
  • Some survey respondents worried the Fed might be underestimating the chances of inflation arising quicker than expected
  • Survey respondents were generally optimistic about the economy

The Federal Reserve, which commences a two-day meeting on Tuesday, is likely to keep interest rates at near-zero levels until 2023, according to a survey conducted by CNBC.

In a radical shift, the Fed recently suggested it will allow a new strategy of permitting inflation to move above its 2% target for certain periods of time while maintaining a very dovish monetary policy.

Most of the survey’s respondents said they think the Fed will not hike interest rates if and when inflation exceeded the 2% figure – even if it remained above that level for over one year.

“The Fed’s adoption of flexible average inflation targeting gives [the central bank] considerable discretion to tolerate an inflation overshoot and rates will remain at the effective lower bound for several years,” said John Ryding, chief economic advisor at Brean Capital.

Respondents, on average, said inflation would have to go as high as 3.2% for a six-month span before the Fed would consider hiking interest rates.

“Low unemployment has been discarded as an inflation driver, but we do not know which culprits we should now watch … neither how long nor how much of an overshoot [in inflation] will be tolerated,” said Lynn Reaser, chief economist at Point Loma Nazarene University in San Diego.

But some survey respondents worried the Fed might be underestimating the chances of inflation arising quicker than expected – given the massive amount of stimulus injected into the economy this year.

“Has everyone forgotten that economic policies have long lags and the impact from policies already employed this year are likely to have considerable positive impact in 2021?,” said Jim Paulsen, chief investment strategist at Leuthold Group. “It’s time for policy officials to step back and take a breath.”

Peter Boockvar, chief investment officer at Bleakley Advisory Group, suggested that the central bank should seek to reverse its views on policy and rates when an effective vaccine for COVID-19 emerges.

However, the survey respondents were generally optimistic about the economy, citing the recession has already ended or will end soon.

“The economy has recovered much sooner and faster than had been expected back in the spring,” said Stephen Shanley, chief economist at Amherst Pierpont Securities. “Real [gross domestic product] growth, inflation, and unemployment are all well ahead of schedule.”

Other sources and experts also think the Fed will keep interest rates ultra-low for a considerable period of time – even if inflation rises.

Kathy Bostjancic, chief U.S. financial economist at Oxford Economics, does not expect the Fed to start hiking rates until 2024.

“The formal adoption [of the new Fed policy framework], along with [Fed Chairman Jerome] Powell’s still cautious economic outlook, underscore that the Fed will keep rates near zero for a long time,” she said.

As for the Fed’s upcoming policy statement on Wednesday, experts are uncertain what Powell has up his sleeves.

“The change in the [policy] framework really doesn’t come into play until you actually get to full capacity and until you actually get some inflation pressure,” Aneta Markowska, chief U.S. financial economist at Jefferies in New York, said according to Bloomberg. “It’s about how the Fed responds to that. And unfortunately, right now, the [economic] projections just don’t extend far enough to capture that.”

Andrew Levin, a former Fed economist and now a professor at Dartmouth College in Hanover, N.H., said: “You’ve got to forecast five and 10 years ahead if you want to talk about average inflation targeting. Professional forecasters think we’re going to be short of the target for the next few years, which really raises the question, what’s the Fed’s longer-run plan?”