The benchmark federal-funds rate target’s upper bound will reach 1 percent by year-end, representing two quarter-point hikes, according to the median estimate of 43 economists surveyed by Bloomberg News this week. However, they lacked conviction about which meeting the next increase would occur: Respondents gave a 6 percent average probability for the June meeting, 30 percent for July and 28 percent for September.
While that contrasts with futures traders who see one increase this year as more likely, the tension between the outlook for rates and the precise timing of a hike shows the difficulties of forecasting the Fed policy path amid choppy reports on the U.S. economy and central bank communication that’s shifted with recent numbers.
“Policy really is data dependent,” said Laura Rosner, senior U.S. economist at BNP Paribas in New York. “It is frustrating for financial market participants that the Fed isn’t a better forecaster than it is.”
Minutes of the April meeting, released last month, cited the possibility of an interest-rate increase at the Federal Open Market Committee meeting being held today and tomorrow, contingent on steady growth and “labor market conditions continuing to strengthen.”
A slump in payroll growth to just 38,000 in May tempered that outlook, and Fed Chair Janet Yellen made no mention of June in a speech this week, while citing confidence in the economy. She also said further gradual increases in the benchmark policy rate “are likely to be appropriate.”
“Based on Fed communication, we really don’t know when it is going to happen,” said Ward McCarthy, chief financial economist at Jefferies LLC in New York.
The federal funds rate is likely to peak during this cycle at just 2.5 percent in the first quarter of 2019, according to the median estimate of respondents. That contrasts with Fed officials’ median March outlook for a rate of 3 percent by the end of 2018 -- which was already significantly lower than the 5.25 percent peak reached before the global financial crisis. Policy makers will give updated forecasts next week.
Forecasters are likely incorporating some risk of shocks slowing U.S. growth. Indeed, global bond yields are signaling the global economy is in trouble: German 10-year bonds had a third weekly gain, pushing yields close to zero, while already-negative yields on Japanese and Swiss securities fell to record lows. The U.S. Treasury 10-year note yielded 1.64 percent at 2:15 p.m. on Friday, the lowest since January .
One reason investors are pessimistic on the central bank’s own policy rate forecast is that pushing the benchmark higher in a time of very low or even negative rates around the world could lead to a dollar rally, causing disinflation at home, said Lou Crandall, chief economist at Wrightson ICAP LLC.
The Fed’s preferred inflation indicator, the personal consumption expenditures price index, rose 1.1 percent in the 12 months ending April. The pace has been below the Fed’s 2 percent target for four years. About 91 percent of economists said inflation wouldn’t reach readings of 2 percent or higher for three consecutive months until 2017 or later.
Even though regional Fed presidents and the April minutes have been providing a form of calendar-based guidance on the next rate increase by pointing to the June meeting, economists polled by Bloomberg don’t expect a strong signal on the next hike.
Three-fourths of the 44 economists responding to the question said Fed would signal the next move by describing progress toward their goals rather than use the explicit “next meeting” language provided in the October statement, the survey showed.
“It is going to be a nudge or a hint, but with the data supporting it,” said Rosner, whose firm predicts the Fed won’t be able to raise rates for at least the next 18 months. “It doesn’t have to come in a specific package.”
Wall Street economists are more inclined than traders to see the Fed raising interest rates twice this year, though they’re less certain on the timing of the first increase.