Wall Street’s top banks are united in the belief the Federal Reserve will raise US interest rates when it meets next week, but recent choppy data on the American economy has created a division of opinion about what happens after that.
Latest US jobs figures, released at the end of last week, showed a severe pullback in hiring in May, but it also showed a drop in the country’s unemployment rate to a 16-year low together with a decent rise in wages. This was seen as enough for Fed policymakers to raise rates for the third time since last December as they seek to scale back monetary stimulus, according to the banks’ economists.
“The overall report shows a continued tightening in labour markets and should help solidify the Fed’s decision to hike rates in June,” said Mark Doms, senior economist at Nomura Securities International, one of 23 US primary dealers that do business directly with the Fed.
The 18 primary dealers surveyed by Reuters expected the Fed to increase the target range on key overnight borrowing costs by a quarter point to 1%-1.25% at its June 13-14 meeting. As for the rate rise after that, ten of the primary dealers expected the Fed to hike rates to 1.25%-1.5% at its September meeting. Six others forecast a rate rise in December.
Questions arose as to when the US central bank might increase rates again after June not just because of the mixed picture on labour conditions, but also due to softening inflation and disappointing vehicle sales.
The core price index on personal consumption expenditure, the Fed’s preferred inflation gauge, slowed to 1.5% in the 12 months through April. That was smallest year-on-year gain since December 2015 and below the Fed’s 2% goal.
All of the primary dealers surveyed expected the central bank to announce by year-end its plan to begin shrinking its $4.5 trillion balance sheet with a scaling back of reinvestments in treasuries and mortgage-backed securities. Six of the 18 said the Fed may detail its balance sheet normalisation at its September meeting, while the rest thought it would wait until December.
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