The U.S. Federal Reserve will hike rates again by end-June and once more before year-end, according to economists in a Reuters poll who are generally as convinced or even more about the trajectory of rates than a month ago.
Fed rate-setters meet next week to decide monetary policy. While policymakers are expected to keep rates on hold then, conflicting economic data in the recent past has clouded the outlook among policymakers and forecasters alike.
Still, economists polled this week gave a 60 percent chance of rates rising by mid-year, encouraged in part by a strong jobs report for February. Financial markets are pricing in a similar probability only by November.
Explaining how his conviction for a rate hike by mid-year has increased, JPMorgan economist Dan Silver said there were concerns economic growth was really losing momentum at the start of the year but those risks have now receded.
“The latest round of indicators, mostly the January reports on retail sales, industrial production and combining them with the payroll report for February – they’ve all kind of reduced those fears.”
But Federal Open Market Committee members do not appear as united on the outlook for rates as they were ahead of the decision in December, when they raised rates for the first time in nearly a decade.
In the past week, Fed Governor Lael Brainard argued for patience in raising rates while Vice-Chair Stanley Fischer warned inflation is showing signs of accelerating, suggesting a preference for tighter policy.
A strong labor market but relatively weak wage inflation has thrown up a challenge for Fed Chair Janet Yellen to provide a clear picture of the policy path, especially as most global central banks remain disposed to ease.
The European Central Bank went beyond all expectations on Thursday, cutting all three of its interest rates and increasing the size of its bond buying program.
But unlike the ECB, the Fed is expected to carry on in the opposite direction, pushing the fed funds target rate up to a range of 0.50 – 0.75 percent in the second quarter and to 0.75 – 1.00 by year end, from 0.25 – 0.50 percent now, according to median forecasts in the poll.
A survey last week of the Wall Street primary dealers – banks who do business directly with the Fed – showed similar results. [FED/R]
“As long as the labor market data remain on track and the signs of somewhat higher inflation come to fruition, then it is likely the FOMC will act unless there is another episode of volatility in financial markets,” said Terry Sheehan, economist at Stone & McCarthy.