Tue, Dec 12, 2017 - Page 10 News List

US growth pickup to spur earlier Fed hike

INDICATORS:The survey of 41 economists showed respondents predicting that growth and inflation would exceed the US Federal Reserve’s expectations, with risks tilting to the upside

Bloomberg

A strengthening US economy might spur the US Federal Reserve to raise interest rates twice between this month and March as a tight labor market pushes risks to the upside, a Bloomberg survey showed.

Median results of the survey of 41 economists, conducted from Tuesday to Thursday last week, showed that economists still expect three rate hikes next year, but moved forward one of those projected moves to March from June.

There was near unanimity that the central bank would raise the target range for the federal funds rate a quarter percentage point from 1.25 percent to 1.5 percent after its two-day meeting starting today in Washington.

“The unemployment rate has fallen sharply to 4.1 percent and on top of that we’ve had two straight quarters of 3 percent-plus growth,” Amherst Pierpont Securities chief economist Stephen Stanley said. “Everything on the economic front is pointing toward more and not fewer hikes.”

The Fed’s Federal Open Market Committee (FOMC) is to issue a statement and new economic projections at 2pm tomorrow. Fed Chair Janet Yellen is scheduled to hold a news conference at 2:30pm.

That is expected to be Yellen’s last post-meeting session with the media. Fed Governor Jerome Powell, US President Donald Trump’s nominee to succeed her in February, is likely to be confirmed by the US Senate.

Economists do not expect the leadership change to result in any major shift in Fed policy next year. Ninety percent of those surveyed said they believe the path of the federal funds rate would be “about the same” next year compared with their expectations had Yellen been reappointed.

However, economists do see the economy beginning to pick up in ways that were not evident in the middle of this year. The survey showed the perceived balance of risks to the outlook for inflation and growth shifting noticeably higher, with 63 percent of those surveyed now seeing risks tilted to the upside.

That means they think it is more likely that growth and inflation will exceed the Fed’s expectations than fall short.

In the September poll, just 25 percent saw risks tilted to the upside.

That balance was tilted to the upside in Bloomberg’s March survey, but shifted to “roughly balanced,” and slightly to the downside, after inflation readings fell below expectations for several months beginning in March.

Bloomberg economists Carl Riccadonna and Yelena Shulyatyeva forecast two rate hikes next year, in June and December. They also expect the FOMC’s median growth projection for next year would jump to 2.4 percent.

The Fed’s preferred gauge of inflation, after excluding food and energy, fell as low as 1.3 percent in August, although it inched back to 1.4 percent in October. It has been below the Fed’s 2 percent target for most of the past five years.

GDP on an annualized basis exceeded 3 percent in the second and third quarters this year, the first time it has done that in two consecutive quarters since 2014.

Economists predicted a few changes in new quarterly projections that Fed officials are to submit next week. Most notably they expected the median Fed forecast for economic growth next year to reach 2.3 percent, up from 2.1 percent in September.

However, they did not expect policymakers to adjust their median forecast for inflation at the end of next year from 1.9 percent.

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