(Reuters) - The U.S. Federal Reserve will move very gradually after it delivers what is widely expected to be its first interest rate hike in nearly a decade next week, according to a Reuters poll that points to a tame inflation outlook for next year.
Now that Fed officials have made clear they are comfortable the employment part of their dual mandate is met, the pace of future rate increases will depend on confirmation that inflation, which is set to rise, actually is rising.
The probability the Fed raises rates from near zero on Dec. 16 rose to 90 percent from 70 percent in the latest Reuters poll of over 90 economists, taken Dec. 4-9. What has not risen at all are expectations for inflation next year.
“To be sure, moving now appears more about getting the first hike out of the way and changing the conversation away from liftoff to the shallow path of hikes expected thereafter than it is about the current state of the economy demanding tighter policy,” Ellen Zentner, economist at Morgan Stanley, wrote in a note.
“So a period of digestion and watching to be sure inflation is, in fact, turning up towards the Fed’s goal and growth remains on track would make sense.”
Median predictions for core PCE inflation, which the Fed watches closely, haven’t fluctuated much in half a year of monthly Reuters polls, now in a 1.5-1.7 percent range for 2016.
There has also been a drop over the same period in the most aggressive core PCE inflation forecasts, particularly for the first quarter of 2016, where the highest forecast has tumbled to 1.8 percent from 2.5 percent.
The lowest core PCE forecasts also fell over the same period, particularly for the third and fourth quarters of next year, to 0.9 percent and 1.0 percent, respectively, from 1.4 percent in earlier polls.
This strongly suggests that while analysts believe the Fed will finally raise rates on Dec. 16 after taking a pass several times this year, they are not convinced the Fed will have the proof it needs to hike rates more quickly than even the most gentle of scenarios.
How much financial conditions tighten and, particularly, how much more the dollar rises will also determine how quickly the Fed will be able to follow up on its first hike. [EUR/POLL]
The median projection of the 17 Fed policymakers in September on the projected path of interest rates was 1.375 percent by end-2016 and 2.625 percent by end-2017.
The latest Reuters poll medians suggest a much more gradual policy path, with economists forecasting the federal funds rate to be 1.0-1.25 percent by end-2016 and 2.25 percent by end-2017, similar to conclusions from recent polls.
Another reason for that slow pace is a tame growth outlook. The world’s largest economy is forecast to expand at a steady 2.4-2.5 percent annualized pace in each quarter over the coming year, little changed from previous polls.
That outlook for steady growth comes despite disastrous starts to the year in recent years, due in part to punishingly cold winters, as well as a West Coast port strike early this year.
But even among the individual contributions, the most optimistic growth forecasts in a sample of almost 50 was 3.5 percent in any quarter. As recently as October, the highest growth forecast for any quarter in 2016 was 4.2 percent.
None of the economists polled expect a recession any time soon, despite the fact the U.S. economy is at a more mature stage of the economic cycle, with initial weekly jobless claims and the unemployment rate both at very low levels.
There is only a 10 percent chance of recession in 2016, according to the median of 36 forecasts provided, with the highest forecast put at less than one in three.
“Based upon the slope of the yield curve the probability of a recession within the next 12 months is less than 5 percent,” wrote Hugh Johnson, who runs economic advisory firm Hugh Johnson Advisors.
“However, given the slowdown in China and the transmission of the slowdown through declining commodity prices, the probability becomes meaningfully higher. The current recovery may indeed end in a quite unconventional way which is understandable given the global reach of economic events.”
(For other stories from the poll)
Writing by Ross Finley in LONDON; Reporting and analysis by Aaradhana Ramesh, Krishna Eluri, Hari Kishan and Kailash Bathija in BENGALURU and Megan Cassella in WASHINGTON; Editing by Meredith Mazzilli