Fed Likely to Raise Interest Rates Twice This Year

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Economy Fed Rate Hike
Susan Walsh/AP
By Megan Cassella

WASHINGTON -- The U.S. Federal Reserve will probably raise interest rates twice this year, with the first increase in almost a decade coming as early as next month, according to a Reuters poll of economists published Thursday.

The survey gave a median 55 percent chance that the U.S. central bank would raise its short-term lending rate twice this year. Economists put a 60 percent probability on a September rate hike and an 85 percent chance that it would move by year-end.

%VIRTUAL-pullquote-If the [Federal Open Market Committee] acts in September, there is a good possibility that it will in December as well.%"If the [Federal Open Market Committee] acts in September, there is a good possibility that it will in December as well," said economist Terry Sheehan of Stone & McCarthy in Princeton, New Jersey.

The case for a September monetary policy move was bolstered by solid job gains and a rebound in wages in July. In addition, economic growth accelerated in the second quarter after bad weather constrained it at the start of the year.

After China's surprise devaluation of the yuan, U.S. financial markets have slightly pushed rate hike expectations to December. The Fed, currently targeting a range of zero to 0.25 percent, hasn't raised interest rates since 2006.

The midpoint of the range of federal funds rate expectations in the survey came to 0.375 percent by the end of September and 0.625 percent at the turn of the year, unchanged from a July poll.

Even if the Fed raises interest rates twice this year, the tightening process would still be gradual, economists said, citing a strong dollar.

'Strong Dollar'

"Their credibility requires a rate increase this year," said Georgia State University professor emeritus Donald Ratajczak. "The strong dollar suggests that a very slow pace is needed until currency values stabilize."

Average hourly earnings are expected to rise slightly beginning in 2016, according to the poll.

The economists forecast wage growth averaging 0.5 percent in the first quarter of 2016 and 0.6 percent in the second. They had previously expected 0.3 percent for both periods.

The more than 80 participating economists saw little impact on the economy from the anticipated slight tightening in monetary policy.

The growth estimate for 2015 was unchanged at an average of 2.3 percent. The survey showed growth accelerating to 2.7 percent next year, little changed from the July poll.

"Monetary policy will still be very accommodative even after the first couple of Fed rate hikes," said Scott Brown, chief economist at Raymond James & Associates in St. Petersburg, Florida. "Raising rates will be a sign that the Fed believes the recovery has made substantial progress and will continue to improve."

Inflation forecasts were little changed from the July survey.

-Lucia Mutikani contributed reporting; Polling by Aara Ramesh and Kailash Bathija.
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