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Business News/ News / World/  Fed seen raising rates midyear even with low inflation
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Fed seen raising rates midyear even with low inflation

Some 45% of 53 economists in a survey said the central bank will raise the benchmark lending rate in June

The policy-setting Federal open market committee will be challenged by reports contrasting the encouraging performance of the US economy with a global outlook that has darkened since they met in December. Photo: BloombergPremium
The policy-setting Federal open market committee will be challenged by reports contrasting the encouraging performance of the US economy with a global outlook that has darkened since they met in December. Photo: Bloomberg

Washington: Federal Reserve officials will look past low inflation and stay focused on raising interest rates around mid-year as they meet this week, according to a narrow majority of economists surveyed by Bloomberg News.

Some 45% of 53 economists in the survey said the central bank will raise the benchmark lending rate in June. 6% said July, while 30% said the Fed will wait until September for the first increase since 2006. Fed officials last month said they expect to raise the rate this year.

“The economy is increasingly showing signs that it is no longer in crisis mode," said John Ryding, chief economist at RDQ Economics in New York, who is forecasting a June increase. “Low inflation is mainly an oil-price story" and that “will be good for the US economy."

The policy-setting Federal Open Market Committee, meeting for the first time in 2015 on Tuesday and Wednesday in Washington, will be challenged by reports contrasting the encouraging performance of the US economy with a global outlook that has darkened since they met in December.

The European Central Bank (ECB) last week announced it would spend €60 billion ($68 billion) a month starting in March on purchases of debt to ward off the threat of deflation—a damaging, widespread decline of prices—in the euro area.

The euro has weakened almost 3% against the dollar since the ECB’s 22 January decision, creating a potential headwind for US growth by making its exports more expensive. Economists in the survey said the Fed would shrug off the impact of a stronger dollar.

Strong dollar

Some 28 survey participants, or 53%, said the rise in the dollar against major currencies makes no difference to the timing of the first rate increase.

Similarly, 66% said the ECB’s decision to start a quantitative-easing programme worth at least €1.1 trillion makes no difference to the timing of the first Fed rate increase.

Any tweaks in the Fed’s communications on the current outlook for the economy and US monetary policy will also be constrained by the lack of a press conference by Fed Chair Janet Yellen after the conclusion of the meeting on Wednesday.

A clear majority of 72% of respondents said they don’t expect the phrasing in the policy statement released at the end of the meeting to signal a significant shift toward the risk that inflation is too low.

“I suspect that the Fed is loath at this point to introduce anything that takes away from the thesis of a mid-year rate increase," said Guy Lebas, managing director at Janney Montgomery Scott Llc in Philadelphia.

Unemployment drops

The US unemployment rate stood at 5.6% in December, close to central bankers’ 5.2% to 5.5% estimate for full employment.

Oil prices have fallen about 20% since Fed officials last met 17 December, and economists are marking up their estimates for growth this year as lower gasoline prices leave households with more money to spend on other things.

A separate survey shows forecasters expect US economic growth of 3.2% this year, according to the median estimate, compared with 2.9% estimated last month.

At the same time, market signals are flashing warnings about the pace of growth and inflation around the world. Yields on US government 10-year notes have fallen to 1.83% from 2.14% since the FOMC last met.

Yields on longer-term government debt are below 1% in France, Germany, Sweden and Japan. A market-based measure of expectations for inflation over the five years starting in 2020 has declined to 1.83% from 1.92% when Fed officials last met.

Low inflation

US central bankers in December forecast an expansion of 2.6% to 3% this year with inflation rising just 1% to 1.6% as measured by the personal consumption expenditures price index.

Yellen said at her press conference following the December meeting that central bankers would have to be “reasonably confident" that inflation would move back to their 2% target over time to begin raising interest rates. She also said there would be no move for at least the next couple of meetings, or not before late-April.

Some 66%, or 35 of 53 economists in the survey, said they didn’t expect the Fed’s preferred measure of inflation, the personal consumption expenditures price index, to show three consecutive readings of 2% or higher until the second quarter of 2016 or later.

Under target

The price index rose 1.2% in December from a year earlier and has been under the Fed’s 2% target for 31 straight months.

Eventually, Fed officials will have to acknowledge that inflation is too low and will that as a reason to delay liftoff, said Robert Brusca, president of Fact and Opinion Economics in New York, among the 29% of economists who held that view.

“Yellen is going to do hopscotch from one indicator to another as she starts to emphasize inflation," said Brusca.

“There are demographic factors and there are technology factors and there are international competitiveness factors that are responsible for wages being as weak as they are," Brusca added. “You aren’t going to change the demographics and you aren’t going to change the technology and the international factors are still in place."

Economists were split on the pace of tightening.

Some 34% said the benchmark lending rate would be between 0.75% and 1% at the end of 2015, while 32% said it would be between 0.5 and 0.75%. Bloomberg

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Published: 27 Jan 2015, 10:38 AM IST
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