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 Friday's weaker-than-expected payrolls report for April acted as the
catalyst for several economists at primary dealers to back away from
their previous predictions for an interest rate increase at the
Fed's next meeting in June.
Moreover, conviction among primary dealers that the Fed would pull
off more than one hike in 2016 is quickly eroding as well, with the
soft employment data standing as only the latest indicator that U.S.
economic growth is far from robust.
U.S. employers added 160,000 jobs in April, the fewest in seven
months. Economists had anticipated more than 200,000 jobs had been
added last month.
"This report did very little to make the case for a June rate hike,"
said Gennadiy Goldberg, an interest rate strategist at TD Securities
in New York. "The data today really underscores our view that the
Fed will want to see more data before hiking rates further."
TD Securities' economists were among those shifting their view on
the next rate hike to September in Friday's survey from June in a
similar poll taken one month ago. Reuters surveyed the 23 primary
dealers, the largest banks authorized to trade directly with the
Fed, following Friday morning's release of the monthly U.S. payrolls
report, and had input from 18.
Fifteen of those 18 forecast the federal funds rate will remain at
its current level of 0.25 percent to 0.50 percent at the end of the
second quarter. In April, 10 of 16 dealers expected the Fed to raise
rates by the end of June.
Thirteen of the 18 expect the Fed to lift rates by a quarter
percentage point to a range of 0.50 percent to 0.75 percent by the
end of the third quarter.
Meanwhile, just nine of 17 respondents see a second rate hike later
in 2016 to a range of 0.75 percent to 1.00 percent. A month ago, 12
of 16 had forecast at least two rate hikes this year.
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"They need more time to be sure that the weakness in the first
quarter is temporary," said Dana Saporta, economist at Credit
Suisse. "The first rate hike will likely come in the second half (of
the year), starting with one in September, followed by one in
December."
Most dealers said their conviction about a rate hike by the end of
June had decreased since last month, and the median probability
assigned by them to a June increase fell to 18 percent from 50
percent in April.
The dealers also lengthened their estimated timeline before the Fed
would start reducing its $4.45 trillion balance sheet. The median
forecast indicates no reduction before 2018 compared with mid-2017
in April's survey.
Dealers continue to see very little probability that the Fed will
employ negative interest rates as several of its peer central banks
have done around the world. Respondents see just a 10 percent
probability of the Fed following suit, unchanged from the April
survey.
(Reporting by Dion Rabouin, Karen Brettell, Chuck Mikolajczak, Sam
Forgione, Richard Leong, Saqib Iqbal Ahmed, Gertrude Chavez-Dreyfuss
in New York, and Anu Bararia and Krishna Eluri in Bangalore; Editing
by Dan Burns and Chizu Nomiyama)
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