Wall Street is looking for lower inflation and stronger growth from the plunge in oil prices but the CNBC Fed Survey shows it still sees the Federal Reserve on track raise interest rates this summer for the first time in eight years.
Instead of seeing the Fed putting off rate hikes because of lower inflation, respondents forecast a gentler rate hike cycle. The average liftoff month remains July 2015 but the estimate for the fed funds rate declined in 2015 to 0.83 basis points, down 6 bps, and 2016 to 1.93, down 11 bps.
The 38 respondents, who include economists, strategists and fund managers, also lowered by 10 bps their estimate of where the Fed would stop hiking interest rates. The so-called terminal rate is now forecast to be 3.2 percent, and the market now sees the Fed hitting that rate in the first quarter of 2018, a quarter later than the previous survey.
“With inflation low and wage growth weak, the Fed can afford to be patient. A pickup in wage growth in 2015 won’t likely change matters, either,” wrote Pimco’s Tony Crescenzi, suggesting the central bank would tolerate the economy running “slightly hot.”
The results suggest that the market senses a commitment by the Fed to begin raising interest rates next year. But changes to the outlook, such as weaker or strong growth, are seen altering the speed of those rate hikes.