December 10, 2014 / 2:41 PM / in 5 years

Fed seen raising U.S. rates in second-quarter despite lower energy prices: Reuters poll

WASHINGTON (Reuters) - The Federal Reserve is likely to raise U.S. interest rates in the second quarter of next year, even as falling energy prices dampen domestic inflation pressures, a Reuters survey found.

The United States Federal Reserve Board building is shown behind security barriers in Washington October 28, 2014. REUTERS/Gary Cameron

In the wake of robust job gains in November and bullish growth signs for 2015, some economists believe the U.S. central bank could signal its intention for a mid-year lift-off after a two-day policy meeting that wraps up on Wednesday.

Such a signal could come through changes to the Fed’s so-called forward guidance on rates and fresh economic projections. The path upward in rates, however, is expected to be slow.

“The decline in oil prices will make the headline for inflation look softer, at least temporarily. However, we look to growth and the labor market indicators as the deciding factors for normalizing interest rate policy,” said Terry Sheehan, a senior analyst at Stone & McCarthy in Princeton, New Jersey.

The Fed has held benchmark overnight rates near zero since December 2008, but a steady if unspectacular recovery from recession has slowly pushed the unemployment rate nearer to levels officials see as in line with full employment.

Thirty-seven out of the 77 economists who participated in the survey expect the first rate hike in the second quarter of 2015, with 27 pinpointing the Fed’s June meeting. Twenty-two anticipate the Fed will wait until the third quarter, while seven expect a rate hike in the first three months of the year.

Faltering global growth and increased U.S. energy production have sent Brent crude oil prices plummeting to near five-year lows. That is putting downward pressure on U.S. inflation, a trend economists expect will last through the third quarter of 2015.

The survey forecast year-on-year rises in the U.S. consumer price index averaging 1.4 percent in 2015. That compares to an average of 1.8 percent forecast in the last poll.

Thirty-eight of 47 contributors who participated in both Wednesday’s poll and a survey taken last month have lowered their inflation predictions for 2015.

Underlying inflation pressures, however, are seen remaining firmer. Excluding food and energy, the core CPI is projected to average 1.9 percent, unchanged from the last survey a month ago.

The Fed has a 2 percent inflation target, but monitors a gauge that is running even further below its goal than the CPI.

“Unemployment trumps inflation as a Fed target. If inflation does not reach the 2.0 percent target because energy prices fall, this is not a concern for the Fed,” said Chris Rupkey, chief financial economist at MUFG Union Bank in New York.

Non-farm payrolls recorded their largest gain in nearly three years in November and job growth this year is on course to be the strongest since 1999, which should translate into better wage gains and, eventually, higher inflation.

Even when the Fed starts tightening monetary policy, the pace of rate increases is expected to be slow and measured, the survey found.

Economists forecast the federal funds rate, the rate banks charge each other for overnight loans, at 0.25 percent in the second quarter of next year, rising to just 1.125 percent by the first quarter of 2016.

“The Fed will pursue a slow tightening cycle when they begin, hiking by 25 basis points at every other meeting,” said Ethan Harris, chief economist at Bank of America Merrill Lynch in New York.

Lower energy prices and accelerating wages should provide a tailwind for the economy by stimulating consumer spending.

Though growth in fourth-quarter gross domestic product is expected to slow after two robust quarters, a pick-up is in the cards for 2015.

The survey forecast GDP growth rising at a 2.4 percent annual rate in the fourth quarter, quickening to a 3.0 percent pace in the first quarter of 2015. In the last poll, fourth-quarter growth was estimated at a 2.6 percent rate, while the pace for the first quarter was forecast at 2.8 percent.

Reporting by Lucia Mutikani; Polling by Deepti Govind and Swati Chaturvedi; Editing by Ross Finley and Chizu Nomiyama

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