The U.S. Federal Reserve is on track to raise interest rates for the first time in nearly a decade in September, according to a Reuters poll that suggests economists now are mostly confident about that timing.
Debate over when the first hike will come has been one of the main drivers of global financial markets this year and those expectations have propped up the dollar, now in the midst of a historic rally since last June.
In a survey conducted over the past week, 37 of 55 economists said their conviction around the timing held steady over the past month, with 10 saying it had increased.
Despite continued tame inflation, news that the economy created 280,000 new jobs in May, along with an improvement in retail sales, has likely helped to cement the now well-established September view.
“Even though the rate of inflation is likely to be well below target, the Fed can justify raising interest rates in September,” said Hugh Johnson, an independent economic adviser.
Financial markets will be watching the statement and press conference on Wednesday following the central bank’s two-day meeting this week for confirmation of that view. Only 2 of 70 economists polled expect a rate hike this week.
The Fed cut its federal funds target rate to a range of zero percent to 0.25 percent in December of 2008.
The poll showed the fed funds target rate would be hiked to 0.375 percent by the end of the third quarter and further to 0.625 percent by end-December.
Among those surveyed, there was no clear consensus on whether the Fed will continue to set interest rates in a band or identify a fixed rate.
The Fed’s last rate increase was in June of 2006.
The survey predicted the economy will likely grow at an annualized rate of 2.5 percent in the second quarter before picking pace to 3.0 percent between July to September after a mild contraction in the first few months of the year.
But that second-quarter consensus is a 0.2 percentage point downgrade from last month’s view and there has been no upgrade to the growth consensus for any of the three following quarters, ranging from 3.0 to 2.7 percent.
Nearly two-thirds of participants, however, said they were confident that growth is back on a strong and sustainable path, with eight saying they were very confident.
The 18 percent dollar rally since last summer, however, poses a risk to the Fed’s plans to normalize monetary policy. By rising sharply against almost every other currency in the world, the dollar makes U.S. exports less competitive.
Economists in the survey were split on whether continued strength of the dollar would significantly impede the Fed’s ability to deliver a series of rate hikes, with 30 saying it would not be an impediment and 24 saying it would.
“Any further strengthening could make the FOMC (Federal Open Market Committee) more wary about the outlook,” said Terry Sheehan, economist at Stone & McCarthy.
“However, as long as overall measures of growth remain at least moderate, it should be a lesser concern among the risks the FOMC has to assess.”
In May, Federal Reserve Chair Janet Yellen said she expected the U.S. economy to strengthen after a slowdown due to “transitory factors” in recent months, and noted that some of the weakness might be due to “statistical noise.”
Inflation as measured by the consumer price index is expected to pick up to 1.0 percent by year-end, rising to 2.1 percent in each of the first three quarters of next year, barely changed from last month’s poll. Core CPI is forecast at 2.0 percent over the same period next year.
So far wage inflation has largely remained muted despite millions of workers finding jobs over the past few years.
A pickup is expected in the coming months according to the poll, with more than half saying a meaningful and sustained increase is likely in the second half of this year.
Source: Reuters (Writing by Tariro Mzezwa and Sumanta Dey; Polling by Sarbani Haldar and Khushboo Mittal; Editing by Ross Finley and W Simon)