Fed set for very gradual rate path after expected Dec 16 hike: poll

The US Federal Reserve will move very gradually after it delivers what is widely expected to be its first interest rate hike in nearly a decade next week, according to a Reuters poll that points to a tame inflation outlook for next year.

Now that Fed officials have made clear they are comfortable the employment part of their dual mandate is met, the pace of future rate increases will depend on confirmation that inflation, which is set to rise, actually is rising.

The probability the Fed raises rates from near zero on Dec. 16 rose to 90 percent from 70 percent in the latest Reuters poll of over 90 economists, taken Dec. 4-9. What has not risen at all are expectations for inflation next year.

“To be sure, moving now appears more about getting the first hike out of the way and changing the conversation away from liftoff to the shallow path of hikes expected thereafter than it is about the current state of the economy demanding tighter policy,” Ellen Zentner, economist at Morgan Stanley, wrote in a note.

“So a period of digestion and watching to be sure inflation is, in fact, turning up towards the Fed’s goal and growth remains on track would make sense.”

Median predictions for core PCE inflation, which the Fed watches closely, haven’t fluctuated much in half a year of monthly Reuters polls, now in a 1.5-1.7 percent range for 2016.

There has also been a drop over the same period in the most aggressive core PCE inflation forecasts, particularly for the first quarter of 2016, where the highest forecast has tumbled to 1.8 percent from 2.5 percent.

The lowest core PCE forecasts also fell over the same period, particularly for the third and fourth quarters of next year, to 0.9 percent and 1.0 percent, respectively, from 1.4 percent in earlier polls.

This strongly suggests that while analysts believe the Fed will finally raise rates on Dec. 16 after taking a pass several times this year, they are not convinced the Fed will have the proof it needs to hike rates more quickly than even the most gentle of scenarios.

How much financial conditions tighten and, particularly, how much more the dollar rises will also determine how quickly the Fed will be able to follow up on its first hike.

The median projection of the 17 Fed policymakers in September on the projected path of interest rates was 1.375 percent by end-2016 and 2.625 percent by end-2017.

The latest Reuters poll medians suggest a much more gradual policy path, with economists forecasting the federal funds rate to be 1.0-1.25 percent by end-2016 and 2.25 percent by end-2017, similar to conclusions from recent polls.

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