Economists are turning hawkish on the prospect for US rate hikes this year

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  • Economists polled by Reuters see the US Federal Reserve hiking interest rates four times this year, above the current view expressed by financial markets.
  • Both inflation and economic growth is expected to be stronger thanks to tax cuts and fiscal spending.
  • Economists are divided as to whether this has brought forward the prospect for the next US recesssion.

While financial markets remain on the fence as to whether the US Federal Reserve will hike interest rates twice or three times this year, economists are now leaning towards the prospect of four rate hikes in 2018.

According to a survey conducted by Reuters, the median economist forecast has risen to four 25 basis point rate hikes arriving this year, up from three in February.

If correct, the median forecast would leave the Fed funds rate sitting at 2.25% to 2.5%, up from 1.25% to 1.5% where it currently sits.

Reuters said the upgrade reflected higher expectations for US inflation and economic growth this year.

The median view for core PCE price inflation, the Fed’s preferred measure of gauging price pressures, is now forecast to reach the Fed’s 2% target by the September quarter before pushing above this level in 2019.

Helping to fuel inflationary pressures, median GDP growth forecasts were also revised higher with an annualised rate of 2.5-3.0% expected for the entirety of 2018, up from a 2.5-2.7% range seen in February.

Full-year median forecasts were for GDP growth of 2.8% for 2018 and 2.4% in 2019, higher than the 2.7% and 2.2% levels seen previously.

The views reflect recent tax cuts delivered to both US business and consumers, along with continued strength in labour market conditions.

Given recent data, Jim O’Sullivan, chief US economist at High Frequency Economics, told Reuters it was now a near certainty that the Fed would lift rates when it meets next week, with the only real question being whether individual Fed members will lift their forecasts for rate rises in the coming year.

“All in all, the data, as well as the anecdotes, make another rate hike at the next week’s FOMC meeting almost certain unless there is some major new negative development unrelated to the economic data between now and then,” he said.

“More debatable is the extent to which the dot plot will change.”

While the prospect of tax cuts and fiscal spending lead to higher forecasts for inflation, economic growth and interest rates, views were more evenly split as to whether this will bring forward the timing of the next US recession.

According to Reuters, 31 of 58 economists said they were not concerned but 27 said they were, including four who said they were very concerned, on the timing of the stimulus at this stage of the already-ageing recovery.

“The risk in stimulus now is that it pushes you closer to the end of the business cycle a little bit faster. The concern is also that you want to have your powder dry for dealing with the next recession and we know it is just a matter of time before the next,” Ethan Harris, Head of Global Economics at Bank of America Merrill Lynch told Reuters.

“If we go into a recession with a very big budget deficit already, it is much harder to respond with new tax cuts and spending increases. So you are using up your ammunition at a time when you don’t need to.”

Reuters has more here.