Wall Street Still Sees Fed on Hold Until June

NEW YORK – The Federal Reserve will likely keep short-term U.S. interest rates steady near four-decade lows until at least late June to make sure the economy recovers fully from its first recession in a decade, a Reuters poll of Wall Street bond dealers found.

None of the 22 primary dealers which transact directly with the Fed expected the central bank to raise its federal funds overnight bank lending rate at its next meeting on May 7, the survey found.

The number of dealers expecting rates to go up at the Fed's late-June meeting fell slightly to 12 from 14 at the last Reuters poll on March 19. But 16 dealers said that by August, a strong, sustainable recovery would be in place to allow benchmark rates to head higher.

While the gears of a broad economic recovery have fired up since the Sept. 11 attacks, a report Friday showing the U.S. jobless rate rose to 5.7 percent in March from 5.5 percent in February caused many investors and analysts to push back the date for an expected Fed interest rate hike.

"It really underscores that the improvement in the labor markets is very gradual at this point and pretty much blows the idea that the Fed would want to quickly raise rates," said Dana Johnson, head of research at Banc One Capital Markets in Chicago.

The poll also found that 16 of 22 dealers expect the fed funds rate, currently at 1.75 percent, to be at least a full percentage point higher by year's end.

At its last meeting in March, the Fed switched its policy stance to say the economy's risks were more balanced between future economic weakness and a buildup in inflation pressures -- a first step before raising interest rates.

Wall Street economists are forecasting robust first-quarter growth of 5 percent to 6 percent, primarily as manufacturers boost production to restock bare shelves after a record-paced inventory liquidation drove the economy into recession last year.

But Fed officials have sounded a note of caution, saying they want to see evidence of solid spending from both consumers and businesses in coming months that will ensure the economic rebound lasts.

Robert McTeer, the president of the Dallas Fed and a member of the the Fed rate-setting committee, said in a Reuters interview late Thursday that he would like to see the unemployment rate fall below 5 percent and factory usage pick up before he would consider lifting rates from their low levels.

"I don't have any time period in mind. We've got slack in the economy," McTeer said.

While some economists have argued that the central bank would likely push benchmark rates up in coming months, saying they are unusually "stimulative" at 1.75 percent, many said the Fed has room to keep rates steady while inflation remains muted.

"It's awfully early for the Fed to be thinking about tightening," said Jim Glassman, senior U.S. economist at J.P. Morgan Chase & Co. "Everybody's obsessing with the low funds rate. You hear it's the lowest in 40 years. But guess what? So is inflation," he said.

Since the last poll, the number of primary dealers has shrunk to 22 from 24. Zions First National Bank and BMO Nesbitt Burns dropped their primary dealer status on April 1.