(Reuters) - The Federal Reserve is still set to raise interest rates by mid-2015, according to a Reuters poll of economists that also found a better-than-even chance bond markets are underestimating how quickly policy will eventually tighten.
The latest poll, conducted Oct 8-15 in the midst of widespread selling on global stock markets, stands in contrast to U.S. interest rate futures markets which in recent days have pushed off the timing of the first hike to late next year.
Deflation or another recession in the euro zone are ranked as the most serious threats to the global economy in the coming year, followed closely by the risk of slower growth in China, the poll also found. [ECILT/WRAP]
Despite the risks, most respondents predicted the U.S. economy would steadily recover, growing by 3.0 percent on average next year, and a near-unanimous belief that the country’s job market was on a solid, sustainable growth path.
“While there are risks to the current recovery, probabilities suggest that the U.S. economy will continue to expand through 2015 at a progressively stronger rate since in part deleveraging has essentially been completed,” said Hugh Johnson, chief investment officer at Hugh Johnson Advisors.
Twenty-four of 47 economists said the Fed’s meeting in June next year was the most likely time for rates to rise by 25 basis points from near-zero, where they have been since late 2008 when the financial crisis first took hold.
Fifteen thought the first rise would come later while eight expected an earlier liftoff, results that loosely mirrored a smaller poll of primary dealers early this month. [FED/R]
“Underlying economic fundamentals are favorable to the outlook and barring a euro zone shock, growth should be sustainable at a higher rate than we have seen in the past few years,” said Sam Bullard, senior economist at Wells Fargo.
Asked whether bond and rate markets were under-pricing the likely series of rate hikes once the Fed begins tightening, 21 of 38 said yes.
The latest polling came both before and after Fed Vice Chair Stanley Fischer and Governor Daniel Tarullo said on the weekend that a global slowdown could delay a rate rise.
Those comments followed a wild week in markets in which the S&P 500 stock index .SPX fell the most since May 2012 on increasing signs of weak global growth. Stock markets have extended their rout into this week.
Until recently, most comments and forecasts by Fed officials have suggested the first rate rise will come around the middle of next year.
In the meantime, the U.S. dollar had risen in anticipation of that shift in policy, which in turned has weighed on inflation expectations.
Over two-thirds of common contributors to this and September’s Reuters poll cut their U.S. inflation outlook for both this year and next.
“The stronger dollar has added to the nervousness. As we noted recently, the impact of recent dollar appreciation, in and of itself, would be muted. But given ‘lowflation’ concerns, it could be seen as the straw that breaks the camel’s back,” Gustavo Reis, global economist at BofA-ML, wrote in a note.
“The market indeed seems to have added the USD to the worry list, taking note of Fed officials highlighting the impact of the dollar.”
The U.S. economy grew at a robust 4.6 percent annual rate in the second quarter after a disappointing 2.1 percent contraction in the first quarter. Unemployment fell to 5.9 percent last month, a six-year low.
Economists predicted quarter-over-quarter gross domestic product growth of 2.1 percent at the end of 2014, rising to 2.9 percent at the end of the next two years.
Unemployment is seen dropping to 5.6 percent by the end of next year while core CPI inflation, a key concern for the Fed, is expected to rise to a 2-percent target by early 2015.
Polling and analysis by Ishaan Gera, Hari Kishan and Kailash Bathija; Editing by Ross Finley and Chizu Nomiyama