Most economists see rate hikes beyond mid-2011

NEW YORK (Reuters) - Most U.S. economists now expect the Federal Reserve to leave interest rates on hold near zero through at least the middle of next year in an effort to prop up the economy, a Reuters poll found on Tuesday.

That compared with expectations the Fed would keep rates steady through at least the end of 2010, according to a majority in a similar poll conducted just over one month ago.

The latest survey of primary dealers was conducted on Tuesday after the Fed announced it would use cash from maturing mortgage bonds it holds to buy more government debt.

Some saw the move as a sea change for the central bank, which until recently had been debating an exit strategy from the massive monetary stimulus injected during the financial crisis.

"Today's move was definitely more aggressive than we had anticipated -- the Fed is worried, they are seeing something they don't like," said Michael Feroli, an economist at JPMorgan in New York.

Although the poll was conducted after the Fed statement on Tuesday, economists said they had already been pushing back expectations for the timing of the next rate increase.

Most economists also downwardly revised their U.S. growth expectations in the past month amid increasing evidence the economic recovery is faltering, according to the survey. Eleven of 14 economists said they had downgraded their U.S. economic growth outlook since the last poll.

There are 18 banks and investment firms known as primary dealers who deal directly with the Fed to carry out monetary policy. Sixteen of the primary dealers responded to the survey.

Fifteen of the 16 respondents expect the U.S. central bank to hold rates in the current zero to 0.25 percent range through the first half of 2011, and six of the 16 respondents are forecasting the current Fed rate range to last through all of next year.

Seven of the primary dealers in the Tuesday poll had pushed back their forecasts for a rate increase, from expectations for a rate hike in the first half of 2011 in last month's poll.

Fed officials have recently been voicing concern about slowing economic growth and persistently high unemployment, as evidenced in Friday's non-farm payrolls report for July.

Still, economists are mixed on whether the Fed will eventually have to again make direct purchases of U.S. Treasuries to stave off a further downturn, as the central bank did during the height of the financial crisis when it bought about $300 billion in longer-term Treasury securities in an effort to combat the U.S. recession.

Five of thirteen economists said they do expect the Fed to again buy Treasuries on the open market, while two said it was possible, one said it was unlikely, and five said they would not.

The economists also ascribe only a minimal chance that the economy will fall into a deflationary spiral over the next 12 months. The median of forecasts from 13 of the economists was for a 20 percent chance of deflation over the next year.