Following a patch of soft data, fewer economists now expect the Fed to raise interest rates at its December policy meeting
By Lucia Mutikani
WASHINGTON (Reuters) - The Federal Reserve is still expected to raise U.S. interest rates in December but signs the labor market may be in a soft patch have dented confidence the central bank will pull the trigger, according to a Reuters poll.
U.S. job growth slowed abruptly in August and September, prompting financial markets to push back until early 2016 their expectations of the first interest rate hike in nearly a decade.
But the poll of over 90 economists showed a 55 percent probability of a lift-off in the Fed's short-term interest rate at the Dec. 15-16 policy meeting, down from 60 percent in a Sept. 22 poll.
Although 58 of 79 respondents were expecting a move by the end of December, they were not fully convinced the U.S. central bank would pull the trigger this year.
"The bigger question will be determining whether this deterioration in labor market momentum is part of a broader inflection point for the economic recovery," said Millan Mulraine, deputy chief economist at TD Securities in New York.
"This is the Fed's 'known unknown,' and a risk management approach will require more patience to assess the incoming labor market data for an answer to the question of whether this is a realignment in the labor market dynamics to a more sustainable path, or a more worrying relapse in the recovery."
Financial markets are pricing in roughly an eight percent chance of a rate hike this month and a 33 percent probability in December. The combination of slower job growth and persistently low inflation mean even if the Fed raises its benchmark rate in December, the path of tightening monetary policy will be very gradual.
The Reuters survey forecast the mid-point of the fed funds target rate at 0.375 percent at the end of December, which implies a quarter point hike from the current zero to 0.25 percent range, unchanged from a Sept. 11 survey.
The mid-point was seen at 0.625 percent at the end of the first and second quarters. In September, economists had forecast an 0.875 percent mid-point at end-June.
"This creates a much more gradual glide path for interest rate normalization as moderate growth continues and other central banks around the world either ramp up monetary accommodation, or keep their monetary taps wide open," said Scott Anderson, chief economist at Bank of the West in San Francisco.
Job growth over the past two months averaged 139,000, the weakest two-month rise since January last year. The slowdown is puzzling given job openings are at record highs and consumer spending is quite robust. U.S. auto sales surged in September to their strongest in more than a decade.
The survey forecast non-farm payrolls averaging 190,000 in the fourth quarter, and dropping to an average of 189,000 jobs in the first quarter of 2016. In a poll conducted in July, economists forecast an average job growth of 225,000 in the fourth quarter and 215,000 jobs in the first.
"We have a dichotomy. The U.S. consumer is carrying the load but firms are being cautious in their hiring," said Joel Naroff, chief economist at Naroff Economic Advisors in Holland, Pennsylvania. "Another explanation is that companies are trying to hire but they are not finding workers with the desired skills who are willing to take the pay being offered."
The unemployment rate was forecast averaging 5.3 percent this year and 4.9 percent next, unchanged from July.
Even with the jobless rate forecast in a range most Fed officials think is consistent with a low but steady rate of inflation, price pressures are expected to remain benign.
The survey forecast the personal consumption expenditures price index, excluding food and energy, averaging 1.3 percent this year and 1.7 percent in 2016. This compares to 1.4 percent and 1.8 percent respectively in the last survey. Core PCE is the Fed's preferred inflation measure.
The U.S. economy, which expanded at an annual rate of 3.9 percent in the second quarter, was forecast to have grown 2.0 percent in the third quarter, down from the 2.5 predicted in September. It will expand 2.7 percent in the current quarter.
(Polling by Siddharth Iyer and Krishna Eluri; Editing by Chizu Nomiyama)