Fifty-one per cent of the 53 leading economists surveyed by the Financial Times said they believed the US central bank would lift rates in June or July after the release last week of the minutes of the Fed’s April policy setting meeting.
Many of the economists who spoke with the FT, including several who believed the Fed would wait until September to lift rates, said the move would be dependent on several key economic reports over the coming weeks — including data on payrolls, retail sales and consumer spending.
Despite a lacklustre start to the year — economists put the risk of a US recession over the coming 12 months at 20 per cent — several indicators have improved from the first-quarter lull.
Retail sales and industrial production accelerated in April, a preliminary reading of consumer confidence rebounded in May to its highest level in nearly a year, and inflation firmed.
“The Fed has positioned itself very firmly if the data improve back to moderate,” said Lindsey Piegza, an economist with Stifel Nicolaus. “They’re not looking for a strong economy or a solid economy, they’re looking for moderate. They’re trying to remind the market that the bar for that second rate increase is much lower than in previous rate cycles.”
After the Fed’s well-telegraphed rate rise in December, financial conditions tightened drastically as bond and equity markets shuddered. The brief but dramatic global sell-off, linked in part to fears over an economic slowdown in China and the rout in commodity prices, has also magnified attention on financial markets.
“Should the Fed be this sensitive to financial markets? No,” said Paul Mortimer-Lee, an economist with BNP Paribas. “But no one borrows at the overnight rate. If financial markets move a lot, it tells you one move in the overnight rate is having a big effect.”
The FT survey, conducted between May 18 and 20, nonetheless underlined some division between economists, with more than a third saying the Fed was likely to wait until September before it next tightens policy.
Many investors and economists warned that June had the potential for pockmarks from a series of events that could rekindle market volatility. Two-fifths of the economists surveyed said the UK referendum on its membership of the EU, which is to be held days after the US central bank’s June policy meeting, was enough to keep the Fed on hold.
More than 90 per cent of economists said the Fed would lift rates once or twice this year. None expected more than three 25 basis point increases in 2016. For 2017, the cohort forecast three more shifts that would lift the federal funds rate to between 1.5 and 1.75 per cent.
Top Fed policymakers have rapidly reoriented the market to a rate rise as soon as next month. Last week Bill Dudley of the New York Fed said it would be reasonable to expect an increase in June or July, a similar line struck by three other Fed presidents.
Market expectations had flatlined before the comments and hawkish April minutes. Traders now put the odds at nearly 50:50 that the Fed will move by July.
“The market consistently underestimates a change in Fed policy a month before the event,” Ms Piegza added. “It is clear the Fed is not going to wait for the market.”
eric.platt@ft.com
