BY AARADHANA RAMESH AND MEGAN CASSELLA
The Federal Reserve will raise interest rates only three times this year as it faces a more subdued outlook for both the U.S. and world economies, a Reuters poll of economists found.
The world’s largest economy is a bulwark for an increasingly shaky global one, and has the most immediate positive prospects for generating inflation with a very low unemployment rate and a solid pace of private hiring.
But a storm has blown through global markets since the start of this year, hitting stock markets, commodities and oil prices based on renewed worries that China, the world’s second largest economy, is struggling.
That has already led some to tone down their optimism over U.S. prospects, underscoring the view that the Fed will be forced to follow up last month’s interest rate rise, its first in nearly a decade, at an even more gradual pace.
The poll of over 90 economists found the U.S. economy will grow 2.5 percent in 2016, the same as predicted for 2015 and down from the 2.8 percent they were expecting a year ago – a decent pace but not enough to generate a strong rebound in inflation.
“U.S. economic growth appears to have shifted to a lower gear in the final months of 2015,” noted Northern Trust economists Carl Tannenbaum and Asha Bangalore.
“It has left many concerned about the well-being of the economy and raised questions about the Federal Reserve’s recent hike of the policy rate,” they wrote, stressing that this does not reflect “a widespread deceleration of economic activity.”
While growth this year is unlikely to be spectacular, respondents only saw a 15 percent chance of the economy sliding into a recession. A majority of those who answered an additional question said they expect the current business cycle to come to an end in the next two to three years.
When it raised rates last month, the Fed expressed confidence that inflation would pick up before long. But most analysts, even the ones more optimistic about growth, remain skeptical that will happen.
Core PCE inflation, the key inflation indicator monitored by the Federal Open Market Committee, is likely to be just 1.6 percent in 2016. It is expected to pick up to 1.8 percent in 2017, under the Fed’s goal of 2.0 percent.
Economists polled by Reuters were more cautious than the Fed, forecasting only three hikes this year and a federal funds rate between 1.00 and 1.25 percent by end-2016, similar to what they were expecting last month.
With financial markets having been in turmoil so far this year, several Fed officials have spoken out in recent days to express their concerns over how much they may be able to raise rates.
“The current expansion is already long by historical standards and risks of a global recession should be on the rise throughout the year,” said Eric Corbeil, a senior economist with Laurentian Bank of Canada.