Fed to hike twice in 2016, undeterred by external risks: Reuters poll

[February 16, 2016]  By Aaradhana Ramesh

BENGALURU (Reuters) - Growing concerns about weak global growth and inflation are unlikely to deter the U.S. Federal Reserve from tightening policy, according to a Reuters poll that suggested two interest rate hikes are likely this year.

The Fed's December decision to raise rates for the first time in nearly a decade has been under scrutiny recently, with some market players suggesting it was a mistake and that Chair Janet Yellen may have to backtrack.

But most economists disagree.

The poll of over 80 analysts predicted another hike would come in the second quarter and penciled in one more towards the end of the year, which would leave rates between 0.75 and 1.00 percent.

That would be one less rate hike than they forecast in a survey taken last month but still more than financial markets expect, further underscoring the growing divide between the two groups.

"Unless the economy rolls over, there is still a very high likelihood of at least one rate hike this year," said Sam Bullard, senior economist at Wells Fargo.

Analysts who answered an additional question assigned a 75 percent chance of at least one hike this year, in contrast with markets pricing in just a 1-in-3 chance.

Markets predict no move until mid-2017, by which time economists expect the Fed to have raised rates four times to 1.25-1.50 percent.

In her testimony before U.S. Congressional panels last week, Yellen also indicated the Fed is likely to stick to its plan of gradually raising rates this year, despite persistent worries over slowing growth in China and volatile financial markets.

At the December policy meeting the Fed's dot plot, a colloquial name for a chart in the central bank's quarterly "Summary of Economic Projections", suggested four rate rises in 2016. That, however, looked too aggressive for economists who assigned a less than 10 percent probability to that path.

"The Fed dots are very likely to come down again in March. The question is whether the Fed dots remain relevant at all," said Thomas Costerg, senior U.S. economist at Standard Chartered.

Costerg is the only forecaster in the survey who expects the Fed to cut rates by the end of the year and said the risk of a recession is high.

According to the poll median there is a 20 percent chance of a U.S. recession over the next 12 months, up from last month's 15 percent and December's 10 percent.

Annual growth and inflation forecasts for 2016 were also downgraded from last month with growth expected to average 2.2 percent and CPI inflation 1.3 percent, down from January's 2.5 and 1.6 percent respectively.

Core PCE prices - the main inflation gauge monitored by the Fed - will average only 1.5 percent this year and 1.8 percent next, largely unchanged from January's predictions.

"This is as good as it gets and if the Fed wants to have a buffer in the form of higher interest rates ahead of the next recession, now is the time to act," said Handelsbanken's U.S. economist Petter Lundvik.

(For poll stories on other economies)

(Polling by Sujith Pai; Editing by Chizu Nomiyama)

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