A buoyant stock market and improving US economic growth have given the Federal Reserve cover to lift interest rates three times this year, including when it meets in less than a fortnight, a Financial Times survey of top economists has found.
About three-quarters of the 43 economists surveyed in March said the Fed would increase interest rates by 75 basis points in 2017, a capitulation from months earlier when both economists and markets said policymaker projections were too optimistic.
Hawkish commentary from Fed policymakers over the past week, rising inflation expectations, alongside higher US sovereign bond yields and record stock market valuations, have left nine out of ten economists predicting the Fed will lift interest rates by a quarter point this month, to a range of 0.75 per cent to 1 per cent.
“The Fed, which has been very comfortable maintaining excessively easy monetary policy and lagging behind markets, may quickly be put into a position of becoming uncomfortable in lagging economic and inflation realities,” said Berenberg economist Mickey Levy.
The median economist projection is a federal funds rate of 1.375 per cent by the end of 2017, and 2.125 per cent by December 2018. Market measures of trader bets also imply three 25 basis-point rate rises this year.
Almost three-quarters of the economists polled expected the US central bank to stop or reduce reinvestment of coupons and principle from securities it held in early to mid-2018.
Several respondents warned that their forecasts could be upended if a combination of spending, deregulation and tax cuts spurred faster economic growth. Two-thirds said they expected “substantive tax reform” to be passed by year-end.
Omair Sharif, an economist with Société Générale, said “all bets are off on where the inflation data goes” if a border adjustment tax is passed by the Trump administration. But he noted the Fed was willing to tolerate inflation that eclipses its policy mandate for a short time.
“The Fed is willing to target inflation in the 2 to 2.5 per cent range because they have missed on the downside for five years,” he said. “They just want to be patient.”
Despite hawkish comments from Fed policymakers, including a speech from chair Janet Yellen in which she said a March rate rise would probably be “appropriate”, several economists still believed the central bank would hold fire this month.
Lindsey Piegza, an economist with Stifel Nicolaus, said that this was “not the first time” markets had wrongly priced in a rise only for the Fed to decide to wait.
“Last year there were many times the Fed talked up a rate hike with near certainty [and] the following week the market was very disappointed,” she said. “If they really adhere to their data dependent stance, which they consistently told us is driving policy, there is no justification for them to raise rates.”
The FT conducted its survey between March 2 and 3, including after Ms Yellen’s Friday speech. Not all economists responded to each question.