By Michael S. Derby
NEW YORK (Reuters) – Ahead of the July Federal Reserve meeting, banks and money managers projected the hike in interest rates they expected for that gathering would be the last the central bank delivered, according to New York Federal Reserve surveys released Thursday.
At the last Federal Open Market Committee, officials raised their target rate a quarter percentage point to between 5.25% and 5.50%, which is what respondents to the surveys of large banks and money managers had expected.
The Fed next meets on Sept. 19-20, and futures markets currently expect no increase for that gathering.
Primary dealers also thought ahead of the July 25-26 FOMC meeting that the Fed would be able to cut rates at the April 2024 meeting. Meanwhile, the Fed’s survey of market participants, which are largely money managers, saw rate cuts starting sooner, with a quarter percentage point easing at the March 2024 gathering.
By the final quarter of next year, primary dealers told the New York Fed they expect a 4% federal funds rate, while the market participant survey predicted 3.88%.
Many expect the Fed to ease rates next year to keep the overall potency of monetary policy stable at a time when inflation is expected to further cool.
The primary dealer survey showed that the banks projected an end to the Fed’s runoff of Treasury securities by the third quarter of next year. The process of shedding mortgage-backed securities could extend beyond 2025, which was as far as the banks were polled.
The big banks expect the total runoff of the Fed’s balance sheet, which is complementary to its interest rate policy, to end during the second or third quarter of next year when holdings stand at $6.75 trillion. Fed holdings peaked in the summer of 2022 at just shy of $9 trillion and currently stand at $8.3 trillion.
The New York Fed survey of banks and market participants are conducted before every FOMC meeting to give officials a sense of how their view aligns with the financial sector, which the central bank relies upon to transmit changes in monetary policy to the broader economy.
On Wednesday, Fed officials released the meeting minutes from the July FOMC meeting that showed some division over the need for their last rate rise. It also showed uncertainty over the need for additional actions now that inflation pressures are showing signs of abating. That said, officials remained worried about inflation and appear ready to act again should they deem it necessary.
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