Fed seen likely to raise rates in 2nd quarter of 2015: Reuters poll

WASHINGTON Thu Jul 17, 2014 10:32am EDT

The sun rises to the east of the U.S. Federal Reserve building in Washington, July 31, 2013. REUTERS/Jonathan Ernst

The sun rises to the east of the U.S. Federal Reserve building in Washington, July 31, 2013.

Credit: Reuters/Jonathan Ernst

WASHINGTON (Reuters) - Rising inflation pressures could push the U.S. Federal Reserve to raise interest rates as early as the second quarter of next year, according to a Reuters poll of analysts.

America's jobless rate sank to almost a six-year low in June and consumer prices posted their largest rise in May in more than a year, bolstering the belief that the U.S. economy is turning a corner.

Now many Fed watchers are bringing forward forecasts on the timing of when the central bank will raise interest rates.

"All things considered, there is now an increased risk of an earlier first rate hike," economists at Bank of America Merrill Lynch said in a report.

Policymakers slashed rates to fight the deep 2007-2009 recession and have held them near zero since 2008. Many analysts now think the Fed is only months away from tightening policy.

The Fed will likely raise its target for the overnight lending rate, known as the Fed funds rate, to 0.25 percent between April and June next year, according to the median forecast of 71 analysts polled in the past week. Economists now see the Fed funds rate ending next year at 0.75 percent.

When surveyed a month earlier, most thought the first hike would come in the third quarter of 2015 but that rates would end the year at 1.0 percent.

The growing confidence in America's recovery from the deep 2007-2009 recession stands at odds with the sharp economic contraction registered in the first three months of this year.

Economists largely dismiss the poor performance as a blip brought on by bad weather. While the median forecast for economic growth in 2014 plunged to 1.7 percent, down a half percentage point since the last poll, forecasters continued to see much stronger growth rates of around 3 percent in 2015 and 2016.

Forecasters are also optimistic over the future path of the unemployment rate, seeing it fall to 6.0 percent by the end of this year and to average 5.7 percent in 2015.

Many experts point out inflation is around the level when historically it has put upward pressure on the pace of price increases, and the poll showed slightly higher forecasts for inflation this year and next.

Wage increases, which are one of the fundamental drivers of consumer prices, have been lackluster since the recession struck. But asked in the poll when wage increases would pose a serious future inflation concern, most economists said this could happen next year.

That is also when many see the Fed hiking rates.

"Confidence is building even among the (Fed's) doves that wage inflation is poised to turn," said Eric Green, an economist at TD Securities in New York.

(Polling by Ishaan Gera and Siddharth Iyer Editing by W Simon)

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