Economists divided over timing of next Fed rate hike: survey

Economists were divided over the timing of the Federal Reserve's next rate hike, reflecting the uncertainty of the economic situation and the lack of clear signals from Fed officials, showed a survey released Thursday.

About 31 percent of 70 economists polled by the Wall Street Journal this month said the Fed would raise its benchmark short-term interest rate at its June policy meeting, while another 31 percent expected the central bank to wait until September.

Another 21 percent believed the Fed was likely to hike rates at its July policy meeting, the survey showed.

It is rare for economists in the survey to be so divided over the timing of a Fed rate increase, the Wall Street Journal reported, noting that "the volatile economic situation and the lack of a clear signal from Fed officials have muddied expectations around interest-rate policy."

The Fed raised its target range for the federal funds rate by 25 basis points to 0.25-0.5 percent in December, the first rate hike in nearly a decade, marking the end of an era of extraordinary easing monetary policy.

But the turmoil in financial markets and a slowdown in global economy since the start of the year have raised increasing concerns about the strength of the U.S. economy, forcing Fed policymakers to hold off on any further rate hikes since then.

The U.S. economy grew at an annual rate of just 0.5 percent in the first quarter of this year, the weakest reading in two years and lower than the 1.4 percent increase in the previous quarter, the Commerce Department reported last month.

However, many Fed officials didn't expect such weakness to persist, suggesting that the economy would bounce back in the second quarter and pave the way for hiking interest rates later this year.

Eric Rosengren, president of the Federal Reserve Bank of Boston, said Thursday that it will be appropriate to continue the gradual normalization of interest rates if incoming economic data continue to be consistent with improvement in labor market and inflation getting closer to the Fed's 2 percent target.

"The market remains too pessimistic about the fundamental strength of the U.S. economy, and the likelihood of removing monetary accommodation is higher than is currently priced into financial markets based on current data," Rosengren said.

The Fed's projections released in March showed that officials expect to raise interest rates twice this year, most likely following the meetings in June and December. But markets currently expect at most one rate increase this year.

"I don't think that policymakers will abandon June as easily as financial market participants," said Tim Duy, a professor at the University of Oregon and a close Fed watcher.

"My sense is that they will remain coy, implying odds closer to 50-50. But the data are not in their favor," said Duy, who predicted that the Fed is more likely to wait until September to raise interest rates. Endit