Fed to Maintain Rates Before November Election; Inflation Remains Low: Reuters Poll

By Sumanta Dey and Deepti Govind

The U.S. Federal Reserve is expected to hold off on raising interest rates until the fourth quarter of the year, likely in December, following the presidential election. This outlook comes from a recent poll indicating that inflation expectations remain subdued.

This anticipated delay marks a significant departure from the four rate hikes predicted by Fed officials at the beginning of 2016, and underscores the hurdles they face despite a robust economy, particularly with increasing global risks stemming from the U.K.’s decision to leave the European Union.

More than half of the 100 economists surveyed in the past week believe that the Fed will raise its federal funds rate from the current range of 0.25-0.50 percent to 0.50-0.75 percent in the fourth quarter. Analysts suggest that December is the most likely time for this adjustment, as the November meeting occurs just ahead of the presidential election.

The remainder of the economists are divided between those who anticipate a potential rise in the third quarter, likely in September, and those who believe any adjustment will be postponed until 2017.

Expectations for a rate increase this year have already been delayed three times since January when a similar poll suggested a hike would occur by March. Meanwhile, central banks in Europe and Asia continue to adopt easing measures.

Sal Guatieri, an economist at a leading financial institution, noted that all indications from the Fed suggest a cautious and gradual approach to policy normalization, especially close to the election, to maintain political neutrality. He mentioned that given the current state of the economy and near full employment, December appears to be an optimal time for a rate adjustment.

The poll predicts an additional two rate hikes in 2017, pushing the federal funds rate to a range of 1.00-1.25 percent by the end of that year.

Regarding risks to the U.S. economy as the election approaches, the majority of respondents pointed to an unexpected slowdown in job growth and business investment as primary concerns. A strong dollar was also noted as a significant risk factor.

One major investment bank, along with another primary dealer, has predicted a 40 percent chance of recession within the next year, with others surveying a range of recession probabilities from 5 to 60 percent, though the consensus remains at about 20 percent. Economic growth is expected to remain slightly above an annualized rate of 2 percent through the end of 2017, albeit with slight downward adjustments since June.

Concerns about inflation persist; despite unemployment sitting at 4.9 percent and likely to decrease further, inflation has not yet reached the Fed’s 2 percent target and is not anticipated to surge.

The latest poll indicates that the core Personal Consumption Expenditures (PCE) price index, the Fed’s preferred inflation measure, will average 1.9 percent in the fourth quarter, up from its current level of 1.6 percent.

Market indicators such as bond yields and economists’ forecasts, along with consumer surveys, continue to reflect low inflation expectations. Following the Brexit vote, yields on benchmark 10-year Treasury notes fell to historic lows as investors sought safer assets, while the value of the U.S. dollar increased over 4 percent during the same period, applying further downward pressure on imported inflation.

Typically, a decrease in the unemployment rate leads to increased inflation and wage growth; however, this phenomenon has not yet materialized meaningfully, likely due to falling oil prices, excess capacity, and relatively weak domestic and international demand.

Analysts have indicated that continued slow wage growth means no imminent threat to broader price increases from the labor market, suggesting 2017 could mark the ninth consecutive year inflation remains below the Fed’s 2 percent target.