June 9, 2017 / 1:13 PM / 2 years ago

Conviction starts to fade for Fed rate hikes beyond June: Reuters poll

(Reuters) - The U.S. Federal Reserve will raise interest rates twice more this year, but conviction for a move beyond a widely expected rise this month has faded for many forecasters along with the outlook for inflation for most, a Reuters poll showed.

An eagle tops the U.S. Federal Reserve building's facade in Washington, July 31, 2013. REUTERS/Jonathan Ernst

Growing doubts about the U.S. administration’s ability to pass tax and healthcare reforms through Congress, along with weak U.S. economic data, have pushed Treasury yields to the lowest since after Donald Trump’s shock election victory in November.

Still, the latest poll of 100 economists conducted this week showed the Fed was certain to push interest rates up by 25 basis points to 1.00-1.25 percent at the June 13-14 meeting.

The consensus view from the poll is for the central bank to follow that up with another 25 basis point increase in the third quarter to take the fed funds rate to 1.25-1.50 percent.

A significant minority of economists, 22 of 49, who answered an extra question said their conviction for the Fed to raise rates again after this month had stayed the same over the past month, with only seven saying the probability had increased.

The remaining 20 said chances had decreased. (For a graphic on the Fed: reut.rs/2sawFta)

Traders’ bets reflect a 98 percent chance of a Fed rate hike next week, according to CME Group’s FedWatch tool on Friday, but their expectations have diminished for a September hike too.

The Fed’s own view is for two more rate hikes this year, after the central bank teed the markets up for a hike in March and delivered.

“Recent U.S. data has been mixed, while inflation in particular has surprised to the downside. If this continues, the Fed’s dot plot may move toward the market, rather than the other way,” noted Athanasios Vamvakidis, global head of rates research at Bank of America Merrill Lynch.

The inflation outlook has been sharply downgraded compared with a poll taken just one month ago, even as the jobless rate fell further below 5 percent to a 16-year low in May.

Predictions for core PCE inflation in 2017, the measure the Fed closely watches, have been cut to their lowest since polling began for this period more than two years ago.

Core PCE inflation is expected to rise between 1.5 percent and 1.7 percent each quarter this year. It is unlikely to hit the Fed’s 2 percent goal until at least the end of next year, the poll found.

While the economy is expected to rebound in the second quarter after a dismal 1.2 percent annualized growth rate in the first, growth is expected to be well short of the more than 3 percent mooted as a target by the Trump U.S. administration. cpurl://apps.cp./cms/?pageId=best-polls

The economy is forecast to expand at an annualized rate of 2.0-2.5 percent each quarter from July until the end of next year, according to the median view in the latest poll. The lowest forecast was 0.4 percent and the highest was 4.1 percent.

Jim O’Sullivan, U.S. economist at High Frequency Economics and the most accurate forecaster in Reuters polls on the U.S. economy last year, took a more positive tone, arguing that the Fed is likely to look through the weaker payrolls growth in recent months.

“We don’t think the trend in employment growth has slowed significantly,” he said. “We continue to expect another 25 basis point hike on June 14. We expect another rate hike in September and then a pause from conventional tightening for the start of balance sheet normalization in December.”

Analysis by Sarmista Sen; Polling by Vartika Sahu and Krishna Eluri; Editing by Ross Finley and Chizu Nomiyama

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