US growth pickup to spur earlier Fed hike in 2018, survey shows

Washington: A strengthening US economy may spur the Federal Reserve to raise interest rates twice in the next 3 1/2 months as a tight labour market pushes risks to the upside, a Bloomberg survey showed.

Median results of the survey of 41 economists, conducted 5-7 December, showed economists still expect three rate hikes in 2018 but moved forward one of those projected moves to March from June. There was near unanimity the central bank will raise the target range for the federal funds rate a quarter percentage point to 1.25% to 1.5% after its two-day meeting starting Tuesday 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,” said Stephen Stanley, chief economist at Amherst Pierpont Securities. “Everything on the economic front is pointing toward more and not fewer hikes.”

The Federal Open Market Committee (FOMC) will issue a statement and new economic projections at 2pm on Wednesday. Fed Chair Janet Yellen is scheduled to hold a press conference at 2:30pm.

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

Economists don’t expect the leadership change to result in any major shift in Fed policy in 2018. Ninety percent of those surveyed said they believe the path of the fed funds rate will be “about the same” next year compared with their expectations had Yellen been reappointed.

Economists do, however, see the economy beginning to pick up in ways that weren’t evident in mid-2017. The survey showed the perceived balance of risks to the outlook for inflation and growth shifting noticeably higher, with 63% of those surveyed now seeing risks tilted to the upside. That means they think it’s more likely that growth and inflation will exceed the Fed’s expectations than fall short. In the September poll, just 25% 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.

The Fed’s preferred gauge of inflation, after excluding food and energy, fell as low as 1.3% in August, though inched back to 1.4% in October. It’s been below the Fed’s 2% target for most of the past five years. Gross domestic product on an annualized basis exceeded 3% in the second and third quarters this year, the first time it’s done that in two consecutive quarters since 2014.

Economists predicted a few changes in new quarterly projections that Fed officials will submit next week. Most notably they expected the median Fed forecast for economic growth in 2018 to reach 2.3%, up from 2.1% in September. They didn’t expect policy makers, however, to adjust their median forecast for inflation at the end of 2018 from 1.9%.

Tax stimulus

For those predicting higher growth forecasts, respondents were split over what would be the single biggest driver, with 15 citing the Republican tax package currently making its way through Congress and 15 pointing to faster global growth.

“Global growth is going to be a positive for U.S. exports, there’s no question about that, but consumer spending is 70 percent of the economy,” said Brian Horrigan, chief economist at money manager Loomis Sayles & Co. in Boston. Tax cuts for households and companies “could be a bigger factor” in boosting the economy in 2018, he said.

When it comes to the biggest threats to the US economy in 2018, 45% chose “an external economic or financial shock.” Another 25% said a steep decline in stocks was the biggest potential threat while 23% chose “a disruption in external trade relations.” Bloomberg