Fourteen of 19 primary dealers, or the banks that deal directly with
the Fed, said they expect the first rate hike by June 2015, with
borrowing costs rising to 1 percent at the end of that year.
The survey results show that Wall Street's top economists were
unmoved by a volatile sell-off last month and an October Fed
statement that was viewed as hawkish.
In a survey taken in early October, 15 of 19 primary dealers also
said the Fed would raise interest rates in June. Even in a separate
survey done after stocks tumbled in a volatile week of trading last
month, 24 of 47 economists still predicted a June rate hike.
The latest view, that the Fed would raise rates in seven months,
comes after a strong October jobs report on Friday. The U.S. economy
added 214,000 jobs in October, the Labor Department said, and the
unemployment rate fell to a six-year low at 5.8 percent even as more
people entered the labor force, a sign of a strengthening and
resilient economy.
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Eleven of 14 economists at these dealers also said the Fed will
increase rates more aggressively than traders in the bond markets
were pricing in U.S. short-term interest rates futures Friday. Fed
funds futures contracts on Friday suggested traders were pricing in
a 34 percent probability of a rate hike for June 2015 and a 63
percent probability in September 2015.
All but three of the 22 primary dealers participated in the latest
survey.
The market selloff last month pushed some measures of U.S. inflation
lower, prompting investors to push back expectations of the first
Fed rate increase to late in 2015 and even into 2016.
But markets quickly recovered and, last week, the central bank
issued a confident-sounding policy statement following its October
meeting that expressed confidence in the U.S. economic recovery even
as concerns mount over weak global growth. It also said
underutilization of labor market resources was "gradually
diminishing."
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"The further drop in the unemployment rate does put a bit of
pressure on (the Fed)," said UBS Securities economist Samuel Coffin.
"It's pretty clear their change in tone on the labor market is
coming a bit true - there is less slack."
The median forecast of 18 dealers for the federal funds rate at the
end of next year was 1 percent, compared with the median forecast of
Fed policymakers of 1.38 percent, according to projections from the
central bank's October meeting.
The median forecast of 14 dealers for the federal funds rate at the
end of 2016 was 2.5 percent, compared with policymakers' median
forecast of 2.88 percent. By the end of 2017, 10 primary dealers
projected a median federal funds rate of 3.5 percent, while
policymakers' median forecast was 3.75 percent.
Since December 2008, the Fed has targeted a range of zero to 0.25
percent for its key funds rate.
(Additional reporting by Rodrigo Campos, Daniel Bases, Gertrude
Chavez-Dreyfuss, Richard Leong in New York; Sarmista Sen and Ashrith
Doddi in Bangalore; Editing by Lisa Shumaker)
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