WASHINGTON (Reuters) - The U.S. Federal Reserve remains on course to raise interest rates in June as a rapidly strengthening labor market and its eventual upward pressure on wages offsets lingering concerns about low inflation, a Reuters poll showed.
But the June call is as close at it’s been in nine months of Reuters polls, with a sample of around 70 economists almost evenly split between June or the first rise coming a bit later in the year and two saying not until next year.
That split comes despite strong hiring over the past several months that has many now saying it’s only a matter of time before a tight labor market generates inflation and forces the Fed’s hand.
Most economists expect the Fed, which has held rates near zero since December 2008, to signal its intention to raise them soon by dropping a pledge to be “patient” in its forward guidance at next week’s policy meeting.
“The Fed will begin to normalize its policy stance in June. And it now seems to be a done deal that the ‘patient’ guidance will be dropped from the March policy statement,” said Harm Bandholz, chief economist at UniCredit Research in New York.
In the meantime most of the data, particularly on the job market, have been positive.
The economy added 295,000 jobs in February, marking the 12th straight month that employment gains have been above 200,000, the longest such run since 1994.
The unemployment rate fell to a more than 6-1/2 year low of 5.5 percent, slipping into territory that some Fed officials consider consistent with full employment.
Some economists, however, say that tepid wage growth and a very benign inflation environment could make the Fed hold off until September or even later. Wage growth has been hovering around 2 percent on a year-on-year basis.
At the same time, inflation is running well below the central bank’s 2 percent target.
“It has become compelling to expect an interest rate increase in June because of stronger-than-expected employment data,” said Hugh Johnson, an independent economic advisor.
“The inflation data and expectations remain extraordinarily subdued and suggest that September will be the earliest that the Fed will raise rates.”
Fed Chair Janet Yellen said last month that the policy-setting committee “needs to be reasonably confident that over the medium term, inflation will move up toward its 2 percent objective” before it starts to raise interest rates.
“For that to happen we first have to see the bottom in inflation tilt higher ... I don’t think the Fed will be in that position until September,” said Millan Mulraine, deputy chief economist at TD Securities in New York.
A plunge in crude oil prices since the summer, against the backdrop of increased shale production in the United States and softer global demand, along with surging dollar strength have dampened inflation.
The Reuters survey forecast consumer price index inflation to average 0.3 percent this year, a slight moderation from 0.4 percent in the February poll. No inflation is forecast at all in Q2, when the Fed is expected to raise rates.
Inflation is expected to accelerate to an average of 2.2 percent in 2016, unchanged from the February survey. The Fed tracks the personal consumption expenditures (PCE) price indexes, which are running well below its target.
While June is a close call, there is almost no doubt among forecasters that rates will rise this year, with economists giving a median 90 percent chance of that happening.
Growth is still forecast to be a brisk 3.0 percent this year, despite getting off to a slow start because of a harsh winter and a now-settled labor dispute at the West Coast ports, which disrupted the supply chain.
Polling by Sarbani Haldar and Sarmista Sen; Editing by Meredith Mazzilli