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Fed seen hiking U.S. rates in second half of 2015 as jobless rate falls

The facade of the U.S. Federal Reserve building is reflected on wet marble during the early morning hours in Washington, July 31, 2013.. REU
The facade of the U.S. Federal Reserve building is reflected on wet marble during the early morning hours in Washington, July 31, 2013.. REU

By Lucia Mutikani

WASHINGTON (Reuters) - The Federal Reserve is expected to start raising U.S. interest rates in the third quarter of next year as the unemployment rate falls and the economy charts a new path of stronger growth, a Reuters survey of economists showed.

The U.S. central bank slashed short-term interest rates to a record low close to zero in December 2008 and committed to keep them there while it nursed the economy back to health.

Thirty-two of 63 economists surveyed forecast the Fed hiking overnight rates in either the second or third quarters of 2015, while 14 saw a rate hike coming earlier and six saw it coming later.

Two simply said sometime in 2015. The median forecast pointed to the third quarter.

"You are looking at an unemployment rate that probably gets below 6 percent by the second half of 2015 and that's within a hair's breath of full employment," said Scott Anderson, chief economist at Bank of the West in San Francisco. "It will start to push up wage growth by that period."

The poll forecast the jobless rate averaging 6.4 percent this year. This suggests that as early as the second quarter of this year, the unemployment rate could breach the 6.5 percent level that Fed officials have said would trigger discussions over when to raise interest rates from near zero.

Policymakers, however, have made it clear that interest rates will remain low for a while even if the threshold for the unemployment rate is met and they are considering ways to revamp their forward guidance.

"I think their commitment will be tested. They may start to raise interest rates sooner than the markets expect," said Ryan Sweet, a senior economist at Moody's Analytics in West Chester, Pennsylvania.

The jobless rate was forecast falling to an average of 5.9 percent in 2015. Back in February, it had been estimated averaging 6.6 percent this year and 6.0 percent in 2015. The unemployment rate was at 6.7 percent last month.

In a vote of confidence in the economy, the Fed in December announced plans to scale back the amount of bonds it buys each month to help keep interest rates low, with the expectation it would wind down by the program by year end.

At that meeting, it dropped its purchases to $75 billion from $85 billion. It announced a further $10 billion reduction in January and is expected to announce another similar cut at its March 18-19 policy meeting.

LABOR MARKET SLACK EASING

With slack in the labor market easing, wage growth is expected to accelerate later this year after being largely sluggish since the recovery started almost five years ago. A shortage of skilled workers in some industries is one reason.

The survey forecast nonfarm payrolls averaging 200,000 jobs per month in the second quarter after being held back by an unusually cold winter early in the year. First quarter job growth was forecast averaging 162,000 jobs per month.

However, rising wages probably will not translate into a build-up in inflation as slowing growth in emerging markets puts downward pressure on commodity prices. Anticipated dollar strength is also expected to help curb inflation pressures.

The survey forecast consumer prices, excluding food and energy, staying below the Fed's 2 percent target through 2014.

The core Consumer Price Index was seen averaging 2 percent in the first quarter of 2015 and holding that level for the next two quarters.

Despite a slow start as unusually cold weather took its toll, growth is expected to average 2.7 percent this year, which would be one of the strongest years since 2005 and a noticeable step up from last year's 1.9 percent.

Gross domestic product was forecast expanding at a 3.0 percent annual rate in the second quarter and sustaining that brisk pace for the rest of the year. First-quarter growth was estimated at a 1.9 percent pace. The economy grew at a 2.4 percent rate in the final three months of 2013.

In February's poll, GDP growth had been forecast at a 2.2 percent pace for the first three months of the year and at a 2.8 percent rate for April-June quarter.

Consumers are expected to be the main drivers of growth, emboldened by higher wages, and rising house and stock market prices. The drag from fiscal policy is expected to be lighter this year.

"There is a lot pent-up demand for autos and housing. The financial health of the consumer is in a better position than it has been since the expansion started," said Anderson.

(Reporting by Lucia Mutikani; Editing by Chizu Nomiyama)

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