The Federal Reserve will increase interest rates twice more in 2017 and begin shrinking its balance sheet before year’s end despite a clear downturn in the outlook for inflation, according to 43 economists surveyed by Bloomberg.
Results of the survey, conducted June 5-8, showed economists expect a rate rise at the end of the Fed’s two-day meeting on Wednesday and another in September, followed by the start of balance-sheet unwinding in the fourth quarter. The economists had previously forecast hikes in June and December. That means expectations for tighter monetary policy firmed slightly even amid falling confidence that the Fed will reach its inflation target any time soon.
After a recent decline in the pace of price rises, just 11 percent of respondents said inflation will record three straight months at or above the Fed’s 2 percent goal this year, compared to 42 percent who made that prediction in March.
“There is a broader slowdown in core inflation that could lead to a persistent undershoot,” said Omair Sharif, senior U.S. economist at Societe Generale in New York, who was among those most concerned by stalling prices. “The Fed needs to be more careful here with how they look at inflation.”
Though widely expected to raise rates this week, Fed policy makers are being pulled in two directions by a spirited drop in unemployment this year and a surprisingly listless reaction in wages and prices. Fed Governor Lael Brainard, who championed a go-slow approach through 2016 before backing increases in December and March, has suggested she may cut her outlook for further moves in the second half of 2017 if weak inflation persists.
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