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 This is the second time this year that economists have delayed their
rate-hike expectations, casting doubt on the likelihood the Fed will
be able to deliver two rate hikes this year as the U.S. Presidential
election in November could make further policy changes sensitive.
Almost a third of more than 90 economists in the poll still expect
the Fed will raise its federal funds rate to 0.50-0.75 percent in
June, suggesting the less than 8 percent chance markets have
assigned to that may be too low.
But many others have backed off calling for a June hike, a view
which has held for the past three months even as rate futures have
swung wildly, following a slowdown in April hiring and a widely
expected poor showing on first-quarter growth.
"It is not that a June rate hike is off the table entirely, but
again, we would need to see some fairly strong data between now and
the June FOMC (Federal Open Market Committee) meeting," said Sam
Bullard, senior economist at Wells Fargo.
The U.S. central bank is now expected to push the fed funds target
rate up to a range of 0.50 percent - 0.75 percent in the third
quarter and to 0.75 - 1.00 percent by year-end, from 0.25 - 0.50
percent now, according to median forecasts in the poll.
Economists gave a 60 percent probability the Fed will pull the
trigger by end-September, while for end-July, they penciled in a 40
percent chance.
HESITATION
The new hesitation among economists comes despite comments by Fed
officials in recent days that suggested the economy is progressing
as they expect and giving no reason to doubt the likelihood of a
rate hike soon.
New York Fed President William Dudley said of the April jobs report:
"It's a touch softer, maybe, than what people were expecting, but I
wouldn't put a lot of weight on it in terms of how it would affect
my economic outlook."
The Fed's policy statement in April was also slightly less dovish
than previous ones, removing concerns about the global economy that
had held it back previously.
Since the last time the FOMC raised rates in December, its view has
changed considerably. At the time, committee members expected around
four rate rises this year, but now they expect two.
Apart from a robust U.S. dollar which has since moderated amid the
Fed's own hesitation, the main reason the Fed has been reluctant to
proceed stems from a lack of convincing evidence of rising
inflationary pressure, not worries over the job market.
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"This is a Fed that is willing to be modestly behind the curve,"
wrote Michael Hanson, global and U.S. economist at Bank of America
Merrill Lynch.
"This approach amounts to the Fed taking an opportunistic reflation
approach and allowing the inflation rate to overshoot its target
after running below for several years."
COOL INFLATION
In March, the Fed's preferred core PCE measure of inflation cooled
to 1.6 percent compared with a year ago from 1.7 percent in February
and is unlikely to be anywhere close to the Fed's 2 percent target
any time soon.
Indeed, forecasts are for core PCE price index to average 1.7
percent this year, 1.8 percent in 2017, and 1.9 percent in 2018.
The U.S. economy needs to expand at an annualized quarterly pace of
2.4 percent to produce the kind of inflation that justifies regular
policy tightening, according to economists in the poll.
But that looks like a tall order.
Economic growth slowed to just 0.5 percent on an annualized basis in
the first quarter of the year. The economy is forecast to grow 1.8
percent this year, down from 2.0 percent expected in last month's
poll, with 2.3 percent growth seen next year.
While many are of the view the U.S. is in the later stages of the
business cycle, economists gave only a 15 percent median probability
of a recession in the next 12 months.
A majority, 45 of 51 respondents, said they were 'confident' the
labor market was in good shape despite a recent slowdown in the pace
of hiring. Four said they were not sure and the remaining two said
they were 'not confident.'
(For poll stories on other economies)
(Polling and analysis by Sarmista Sen and Shrutee Sarkar; Editing by
Ross Finley and Bernadette Baum)
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