Wall Street sees repeat of three U.S. rate hikes in 2018: poll

A street sign for Wall Street is seen outside the New York Stock Exchange (NYSE) in Manhattan, New York City, U.S. December 28, 2016. REUTERS/Andrew Kelly

(Reuters) - Wall Street’s top banks expect the Federal Reserve to raise U.S. interest rates three times in 2018, matching the number of rate hikes this year and the central bank’s own outlook, as policy-makers turned more upbeat on economic growth and the jobs market.

Still, stubbornly low inflation remained a worry for policy-makers who saw consumer price growth stuck below their desired 2-percent goal in 2018. This meant core inflation would be running below that critical threshold for 6-1/2 years, according to a poll of the primary dealers conducted on Wednesday.

“They feel good about growth and the labor market, but there is still a lot of uncertainty about inflation. That is a key thing that’s holding them back,” said Matt Luzzetti, senior economist at Deutsche Bank, one of the 23 dealers that do business directly with the Fed.

Business activities is seen enjoying a boost if Congress passes the steep tax cuts Republican lawmakers have proposed and President Donald Trump has endorsed.

The poll was taken on Wednesday after the Fed raised key short-term rates by a quarter point to a range of 1.25-1.50 percent, marking the third rate hike in 2017 and the fifth one that started two years ago.

As the economic expansion has hummed along, Fed Governor Jerome Powell, who will succeed Fed Chair Janet Yellen to head the central bank early next year, was expected to stick close to Yellen’s playbook of gradually raising rates and unwinding the Fed’s nearly $4.5 trillion balance sheet, the latest poll showed.

That said, Powell, who is widely viewed as a centrist on monetary policy, is seen overseeing a more hawkish Federal Open Market Committee, the central bank’s policy-setting group, in 2018 than the current set of voting members this year.

“Next year the voting line-up turns quite a bit more hawkish,” Michael Feroli, Fed watcher at JPMorgan, a primary dealer, wrote in a research note.

Additional reporting by Dan Burns, Charles Mikolajczak, Rodrigo Campos, Sinead Carew, Dion Rabouin, Gertrude Chavez-Dreyfuss, Lewis Krauskopf and Caroline Valetkevitch; Writing by Richard Leong; editing by Diane Craft