May 12, 2016 / 11:57 AM / a year ago

Fed to delay rate hike until September on tame inflation outlook: Reuters poll

The Federal Reserve building in Washington September 1, 2015. REUTERS/Kevin Lamarque

(Reuters) - The U.S. Federal Reserve will likely wait until September before raising interest rates again, stretching to nine months the time since its first hike in nearly a decade, as it waits for clear signs inflation is picking up, a Reuters poll found.

This is the second time this year that economists have delayed their rate-hike expectations, casting doubt on the likelihood the Fed will be able to deliver two rate hikes this year as the U.S. Presidential election in November could make further policy changes sensitive.

Almost a third of more than 90 economists in the poll still expect the Fed will raise its federal funds rate to 0.50-0.75 percent in June, suggesting the less than 8 percent chance markets have assigned to that may be too low.

But many others have backed off calling for a June hike, a view which has held for the past three months even as rate futures have swung wildly, following a slowdown in April hiring and a widely expected poor showing on first-quarter growth.

“It is not that a June rate hike is off the table entirely, but again, we would need to see some fairly strong data between now and the June FOMC (Federal Open Market Committee) meeting,” said Sam Bullard, senior economist at Wells Fargo.

The U.S. central bank is now expected to push the fed funds target rate up to a range of 0.50 percent - 0.75 percent in the third quarter and to 0.75 - 1.00 percent by year-end, from 0.25 - 0.50 percent now, according to median forecasts in the poll.

Economists gave a 60 percent probability the Fed will pull the trigger by end-September, while for end-July, they penciled in a 40 percent chance.

HESITATION

The new hesitation among economists comes despite comments by Fed officials in recent days that suggested the economy is progressing as they expect and giving no reason to doubt the likelihood of a rate hike soon.

New York Fed President William Dudley said of the April jobs report: “It’s a touch softer, maybe, than what people were expecting, but I wouldn’t put a lot of weight on it in terms of how it would affect my economic outlook.”

The Fed’s policy statement in April was also slightly less dovish than previous ones, removing concerns about the global economy that had held it back previously.

Since the last time the FOMC raised rates in December, its view has changed considerably. At the time, committee members expected around four rate rises this year, but now they expect two.

Apart from a robust U.S. dollar which has since moderated amid the Fed’s own hesitation, the main reason the Fed has been reluctant to proceed stems from a lack of convincing evidence of rising inflationary pressure, not worries over the job market.

“This is a Fed that is willing to be modestly behind the curve,” wrote Michael Hanson, global and U.S. economist at Bank of America Merrill Lynch.

“This approach amounts to the Fed taking an opportunistic reflation approach and allowing the inflation rate to overshoot its target after running below for several years.”

COOL INFLATION

In March, the Fed’s preferred core PCE measure of inflation cooled to 1.6 percent compared with a year ago from 1.7 percent in February and is unlikely to be anywhere close to the Fed’s 2 percent target any time soon.

Indeed, forecasts are for core PCE price index to average 1.7 percent this year, 1.8 percent in 2017, and 1.9 percent in 2018.

The U.S. economy needs to expand at an annualized quarterly pace of 2.4 percent to produce the kind of inflation that justifies regular policy tightening, according to economists in the poll.

But that looks like a tall order.

Economic growth slowed to just 0.5 percent on an annualized basis in the first quarter of the year. The economy is forecast to grow 1.8 percent this year, down from 2.0 percent expected in last month’s poll, with 2.3 percent growth seen next year.

While many are of the view the U.S. is in the later stages of the business cycle, economists gave only a 15 percent median probability of a recession in the next 12 months.

A majority, 45 of 51 respondents, said they were ‘confident’ the labor market was in good shape despite a recent slowdown in the pace of hiring. Four said they were not sure and the remaining two said they were ‘not confident.’

(For poll stories on other economies)

Polling and analysis by Sarmista Sen and Shrutee Sarkar; Editing by Ross Finley and Bernadette Baum

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