U.S. rates expected to rise in December, but lackluster growth looks likely

October 18, 2016 10:12 AM

The U.S. economy is expected to grow only modestly into next year, keeping inflation low, but the chances the Federal Reserve will raise interest rates in December are now put at 70%, a Reuters poll found.

Eight years after the financial crisis, the world's biggest economy has yet to find solid footing. Patches of decent growth are followed by bouts of weakness, suggesting a return to pre-financial-crisis growth rates may be difficult.

Through it all, stubbornly weak inflation has encouraged the Fed to maintain ultra-loose monetary policy, although solid employment hints that earnings-led inflation may soon pick up.

The poll of nearly 100 economists taken in the past week forecast that annualized quarterly growth accelerated to 2.6% in the quarter just ended, up from 1.4% in Q2, but will then slow to 2.3% in October-December.

For next year, economists forecast the economy would expand 2.0 to 2.1% in each quarter. Those expectations are little changed from the past several polls.

Forecasts for 2017 quarterly growth ranged from a low of 0.3% to 3.2%, versus 1.3 to 3.5% in the September poll.

The median probability of a recession in the coming year slipped, however, to 15% from 20% last month.

"This is as good as it is going to get," said Ryan Sweet, an economist at Moody's Analytics, underscoring the doubts for a return to the close to 4% prevalent before the financial crisis.

"But the fundamentals are very strong for the consumer and 2017 should be a good year. Household balance sheets are in very good shape, the job market is tightening and wage growth is accelerating."

The poll predicted the unemployment rate would fall to 4.7% on average in 2017, from 5.0% now, although that is likely to run in tandem with a slowdown in hiring. About 150,000 new jobs are likely to be added on average each month in 2017, versus the 178,000 monthly average so far this year.

That entrenched outlook for sluggish growth compared with previous recoveries is slightly at odds with policy expectations for the Fed, the only major central bank to have raised rates recently.

Economists gave a median 70% chance of the Fed raising rates to 0.50-0.75% at its Dec. 13-14 meeting. Three analysts gave a less than even probability, down from six last month.

Financial markets, meanwhile, are pricing in a 64% chance of a December move. That spread between market and economist expectations is the narrowest since a year-end Fed hike became the most likely scenario a few months back.

The poll showed two more 25-basis-point rate increases are likely in 2017, in the second and fourth quarter, taking the Fed funds rate to a range of 1.000 to 1.125%, similar to what policymakers project.

Despite calls for steady tightening, economists have hardly revised their views on the Fed's preferred gauge of inflation—personal consumption expenditure—which has mostly run below its 2% target since 2008.

Core PCE is predicted to average 1.7% this year and 1.8% in 2017. The median from Fed policymakers' latest projections was 1.9% for next year.

On a separate question before the November Presidential election, most of the respondents—50 of 54—said Democrat Hillary Clinton's election platform was likely to generate the best U.S. economic outcome over the longer term.

About the Author