In March, officials at the Federal Reserve (Fed) announced that they would leave the target range for the Fed funds rate unchanged at 0.25 percent to 0.50 percent. The statement released by officials at that Federal Open Market Committee (FOMC) meeting was unexpectedly dovish, and more recent comments from various committee members have generally supported the view that the Fed could move slower with interest rate normalization than previously anticipated. As a result, just one of the business and academic economists surveyed this month by the Wall Street Journal believes that Fed officials will raise interest rates at the April policy meeting. Roughly three-quarters of surveyed economists instead expect the next hike to occur at the June FOMC meeting but financial markets are currently pricing in an even later date for the next rate increase.
By the end of 2016, surveyed economists on average believe the Fed funds rate will be 0.84 percent, which implies only two quarter-point rate increases this year and therefore agrees with the more dovish forward guidance provided by officials at last month’s FOMC meeting. Recent Fed commentary, though, is not the only factor behind economic forecasters’ lowered expectations for rate hikes in the coming months. For example, overall growth outlooks have also softened lately, with surveyed economists expecting U.S. gross domestic product (GDP) to expand by just 2.1 percent in the year ahead, down from 2.4 percent in last month’s survey. This is not too surprising since official estimates of first quarter GDP growth fell to just +0.1 percent last week. Job growth forecasts have also slid recently, with surveyed economists now anticipating an average of 185,000 payrolls to be added each month in 2016. That is down from the March survey but still more than enough to keep up with population growth and continue to chip away at the unemployment rate. Also encouraging is that surveyed economists currently put the probability of a U.S. recession occurring this year at just 19 percent, down from earlier surveys.
Sources: FRBG, FRBA, Twitter, Wall Street JournalPost author: Charles Couch