Fed Expected to Raise Rates in December After Election: Reuters Poll

By Sumanta Dey and Deepti Govind

The U.S. Federal Reserve is anticipated to increase interest rates in December, following the presidential election on November 8, according to a recent poll. The survey also indicated an expectation for economic growth to pick up, although inflation remains relatively subdued.

If the Fed proceeds with a rate hike, it will mark one full year since the last increase, a timeline that many Fed policymakers and private analysts had not projected. The poll also suggested that there may be two additional rate hikes next year, potentially bringing the federal funds rate to a range of 1.00-1.25 percent by the end of 2017.

The decision to adjust rates in 2016 has been postponed, initially due to a sharp drop in global markets and later following the Brexit vote. Nevertheless, the Fed’s willingness to tighten monetary policy reflects both the strength of the U.S. economy and the challenges the central bank faces in doing so, especially as central banks in Europe and Asia pursue looser policies. For example, New Zealand has recently reduced interest rates to record lows in an effort to combat deflation and manage its currency’s strength.

Out of the 95 economists surveyed, 69 predicted that the federal funds target rate would rise to 0.50-0.75 percent by the fourth quarter, up from the current 0.25-0.50 percent. Only one economist projected a year-end rate of 0.75-1.00 percent.

With inflation expectations remaining subdued, a narrow majority of economists believe that a rate hike in 2016 would primarily serve as a confidence boost rather than a response to inflationary pressures. After a disappointing 1.2 percent annualized growth in the second quarter, the U.S. economy is projected to grow by 2.5 percent in the third quarter and slightly more than 2 percent in each quarter until the end of 2017, according to the poll results.

Respondents indicated that the core personal consumption expenditure price index, which the Fed favors as an inflation measure, is expected to average just 1.8 percent in the fourth quarter and remain below the Fed’s 2 percent target through the end of 2017.

Justin Lederer, an analyst at Cantor Fitzgerald, expressed that he anticipates one interest rate increase in December, attributing the timing in part to the upcoming election. Economists provided a median probability of 58 percent for a December rate hike, marking an increase from last month’s poll.

However, financial markets assign only slightly more than a one-in-three likelihood of a rate increase during the December 14 meeting. A majority of surveyed economists acknowledged that the probability of a September hike rose after a recent jobs report showed the creation of 255,000 new jobs in July, alongside an uptick in wage growth, but this was still not seen as the prevailing view. The chance of a September hike was pegged at just 25 percent, with only a few economists predicting such a move.

Some banks have suggested that there may not be any rate increases this year at all.