Most Wall Street firms still project June 2015 US interest rate hike

Traders work on the floor of the New York Stock Exchange on Dec 17, 2014. Economists at Wall Street's biggest banks remain convinced the Federal Reserve will raise interest rates by next June and most expect the Fed to tighten policy more than once i
Traders work on the floor of the New York Stock Exchange on Dec 17, 2014. Economists at Wall Street's biggest banks remain convinced the Federal Reserve will raise interest rates by next June and most expect the Fed to tighten policy more than once in 2015. -- PHOTO: AFP

NEW YORK (Reuters) - Economists at Wall Street's biggest banks remain convinced the Federal Reserve will raise interest rates by next June and most expect the Fed to tighten policy more than once in 2015, a Reuters poll found after the U.S. central bank wrapped up a policy meeting on Wednesday.

Thirteen of 19 primary dealers, or the banks that deal directly with the Fed, said they expect the first rate hike by June, including one forecasting a hike as early as April. All but two expect at least one rate hike in 2015.

Sixteen of these economists expect at least two increases next year, with 10 of them predicting three. The median expectation for where rates will end the year is 1 percent.

The Fed last raised interest rates in 2006 and has held its target policy rate near zero since the financial crisis in late 2008.

The survey results show that Wall Street's top economists remain unmoved by plummeting oil prices and weak global growth. In a separate poll conducted earlier this month, 37 out of 77 economists projected a rate hike in the second quarter of 2015 despite falling energy prices that have dampened domestic inflation pressures.

All but three of the 22 primary dealers participated in the latest survey.

On Wednesday, the Fed said it would take a "patient"approach in deciding when to bump borrowing costs higher, which Fed Chair Janet Yellen, at a news conference, defined as "at least a couple of meetings." "That does not point to any present or predetermined time," Yellen said.

The primary dealers poll results are at odds with market-based mechanisms for predicting the Fed's lift-off date.

Fed funds futures contracts on Wednesday suggested traders were pricing in just a 26 per cent probability of a rate hike for June 2015, according to CME Fed Watch. The first contract with more than a 50 per cent probability of a hike based off futures prices is September 2015, with an implied probability of 62 per cent.

As expected, the Fed on Wednesday looked beyond economic difficulties in the euro zone, Japan and Russia and offered a mostly upbeat assessment of the U.S. economy.

Twelve of 15 economists at these dealers said they expected the Fed to stop topping up its US$4.5-trillion balance sheet by the first quarter of 2016. The central bank ended its quantitative easing program of bond purchases in October.

Falling oil prices, which hit a 5-1/2-year low this week, have pushed inflation lower. Eight of 18 primary dealers said this would not deter the Fed from tightening policy if the sell-off continues, but seven said that it could.

"It was encouraging to see the Fed act in clear-headed fashion by pushing back on shrill cries for it to signal greater concern," said Derek Holt, an economist at Scotiabank. "They were dead right to have largely stayed the course."

The median forecast of 19 dealers for the federal funds rate at the end of next year was 1 per cent - unchanged from a November poll of these economists - compared with the median forecast of Fed policymakers of 1.13 per cent, according to the latest projections policymakers, updated on Wednesday. That gap is now more modest than earlier, as FOMC members on balance brought down their estimates for the path of rate increases.

The median forecast for the federal funds rate at the end of 2016 was also unchanged at 2.5 per cent, which matches policymakers' expectations.