BENGALURU, March 17 (Reuters) - The U.S. Federal Reserve will raise interest rates by 25 basis points on March 22 despite recent banking sector turmoil, according to a strong majority of economists polled by Reuters who were divided on the risks to their terminal rate view.
Market pricing for the upcoming meeting has been on a roller-coaster ride, switching from expecting a 50 basis point move after Fed Chair Jerome Powell's testimony last week to a pause at one point following the failure of some regional banks.
U.S. two-year Treasury yields , which typically reflect near-term interest rate expectations, fell more than 80 basis points this week after the failure of Silicon Valley Bank, the largest bank collapse since the 2008 financial crisis.
But Reuters poll predictions for the March meeting ultimately held steady from last month, with 76 of 82 economists predicting a quarter-point hike in line with interest rate futures, bringing the federal funds rate to 4.75%-5.00%.
That would come after the European Central Bank's decision on Thursday to follow through with a 50 basis point rise it pre-announced in February, prioritizing sticky inflation.
Only five respondents in the latest Fed poll expected a pause, including four primary dealers, with only one bank, Nomura, expecting a 25 basis point cut.
"The past week's financial turmoil will give the Fed some misgivings about pushing rates much higher," said Bill Adams, chief economist at Comerica Bank. "But the Fed's policymakers have repeated many times they are more worried about raising rates too little than raising them too much."
"A pause in March is possible, but they are more likely to hike and risk erring on the side of too much restraint."
While some respondents were hesitant to provide a rate outlook beyond March, 56 of 64 economists said there would be at least one more 25 basis point hike in the second quarter, taking the fed funds rate to a peak of 5.00%-5.25%, in line with the previous poll.
Respondents to an additional question were almost split on the risks to their terminal rate forecast, with a slight majority, 12 of 23, saying the peak rate could be lower than they expect.
Significant majorities in previous polls said the risks were skewed towards a higher terminal rate.
"We see considerable uncertainty about the Fed's path in March and beyond," said David Mericle, chief U.S. economist at Goldman Sachs, one of the few who expects a pause in March. "It is hard to be too confident at this point."
Mericle expects more hikes however, with a peak rate of 5.25%-5.50% in Q3, higher than the poll median.
The poll found a median 65% probability of a U.S. recession in the coming two years, and forecast growth of only 1.0% this year and next.
Most economists still say the Federal Open Market Committee will maintain its "higher for longer" mantra and keep rates on hold for the remainder of this year at least.
Only eight of 63 respondents with an end-2023 view had a cut in their forecast, similar to market expectations.
Inflation, still running well over twice the Fed's 2% mandate, will remain above target at least until 2025, the poll showed. Meanwhile the labor market is showing few signs of weakness, with unemployment rate forecasts broadly lower compared with last month's poll.
"If the FOMC now aborts its mission to stamp out inflation from the system, it loses credibility as an inflation fighter and long-run inflation expectations are likely to become unanchored," said Philip Marey, senior U.S. strategist at Rabobank.
(Other stories from the Reuters global economic poll)
