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 The Fed hiked rates for the first time in nearly a decade on Dec 16,
confident the U.S. economy can stand higher borrowing costs after
years of stimulus and near-zero rates, although Janet Yellen, who
chairs the rate-setting Federal Open Market Committee, made clear
future increases would be gradual.
Considering the muted outlook for inflation and oil prices, a strong
dollar hurting U.S. manufacturers, and the continued fragile state
of the global economy, the Fed may have to be cautious with future
rate hikes.
Still, 77 of 120 economists in a snap poll conducted a couple of
days after the meeting, said rates will next move higher by March.
And all others but two said it would happen in the second quarter.
"Defining 'gradual' and divining how the FOMC will implement a
gradual rate increase will become the new parlor game for financial
markets and monetary policy wonks," William Lee, head of North
American Economics at Citi, wrote in a note.
"We are confident that the actual pace of interest rate increases
likely will be slower than that implied by the FOMC 'dots'. Not only
are there downside risks to the outlook, but the FOMC's own
predilection for responding to financial market distractions likely
will dampen the pace of rate increases."
Fed policymakers - whose views are visually plotted and published by
the Fed as dots - currently estimate rates at 1.25-1.50 percent by
the end of 2016, 100 basis points higher than the current rate.
The median forecast among economists polled by Reuters, however, is
that the fed funds target rate would be 1.00-1.25 percent by then.
HAWKS AND DOVES
The most hawkish prediction in the poll is that rates would reach
1.75-2.00 percent by the end of next year and the most dovish said
the Fed will not hike rates again at all in 2016.
Just seven of the 106 economists who gave end-year forecasts said
rates would move higher than the Fed's own dot plot, while only 2 of
all the 22 primary dealers thought the FOMC dots were about right
for the end-year fed funds rate. The rest said rates would be lower.
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Bets in the futures market indicate traders are currently pricing in
higher rates only in June.
The risk, however, is that inflation fails to rise as predicted.
Core PCE inflation, which the Fed watches closely, is forecast
around 1.5-1.7 percent through 2016 - similar to what Fed
policymakers expect, but lower than the 2 percent target.
With oil prices likely to stay low through next year, those
expectations may be optimistic. That's especially true considering
the strong dollar, which is predicted to remain firm, makes imports
cheaper in the U.S.
"Low inflation expectations reflect the persistent realities about
the current recovery where lower commodity prices and competition
from abroad have kept a lid on price pressures," wrote John Silva,
chief economist at Wells Fargo.
"Inflation, measured by the PCE deflator, has averaged slightly less
than 2 percent since 1994. This brings into question the value of
having a 2 percent target when it has not been achieved for what
could be considered the long run."
The outlook for growth is also tame, expected at a steady 2.4-2.5
percent annualized pace in each quarter over the coming year.
(Additional reporting and polling by Kailash Bathija; Editing by
Ross Finley/Jeremy Gaunt)
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