Featured # Editorials | 3 years ago

Fed Likely to Raise Rates Twice This Year, Disregarding Outside Risks

Mounting fears about depressive global growth and inflation are improbable to discourage the U.S. Federal Reserve from tightening policy, according to a number of economists that advised two interest rate raises are probable in 2016. The Fed’s December determination to hike rates for the first time in nearly a decade has been under scrutiny currently, with some market players saying it was a mistake and that Chair Janet Yellen may have to backpedal.

However, most economists disagree. A poll of more than 80 analysts forecasted another raise would happen in the second quarter and expect one more towards the end of the year, which would bring rates between 0.75 and 1.00 percent. That would be one less rate raise than they predicted in a survey taken in January but still over financial markets anticipate, further underlining the rising gulf between the two groups. Analysts who replied to an additional question stated a 75 percent probability as a minimum of one raise this year, different from markets pricing in just a 1-in-3 opportunity. Markets forecast remain until mid-2017, by which time economists suppose the Fed to have hiked rates four times to 1.25-1.50 percent.

In Yellen’s testimony before U.S. Congressional panels last week, she also pointed out the Fed is probably going to follow its plan of progressively hiking rates this year, despite insistent fears over a cooling economy in China and instable financial markets. At the December policy meeting the Fed’s dot plot, an idiomatic name for a chart in the central bank’s quarterly “Summary of Economic Projections”, proposed four rate hikes in 2016. However, it looked too aggressive for economists who have given a less than 10 percent chance to that course.

According to the poll median there is a 20 percent chance of a U.S. recession over the next year, increased from last month’s 15 percent and December’s 10 percent. Annual growth and inflation expectations for 2016 were also reduced from last month with growth forecasted to average 2.2 percent and CPI inflation 1.3 percent, dropped from January’s 2.5 and 1.6 percent respectively. Core PCE prices – the main inflation measure checked by the Fed – will average only 1.5 percent in 2016 and 1.8 percent in 2017, significantly unmoved from January’s expectations.

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