NEW YORK – The Federal Reserve (search) cemented Wall Street economists' expectations for another rate increase in November with its even-handed statement Tuesday on the economy, a Reuters poll found.
As they raised official borrowing costs, Fed officials sounded a bit more optimistic on economic growth, but a little milder on the current state of inflation.
In doing so, the Fed offered something for both camps in financial markets — those who think the central bank will pause in its rate-rise campaign later this year, and those who believe it will press on.
A Reuters survey of the top economists on Wall Street found all 22 analysts think the ber, which we expect to occur unless growth and the labor market show signs of faltering significantly in the weeks ahead," said Deutsche Bank chief economist Peter Hooper.
Bond market bulls, who have taken to heart recent softer economic news and doubt the Fed's optimism, were banking on a clearer hint the Fed could take a breather in its rate-rise campaign. But they didn't get it.
That prompted short-term Treasuries to cave in when the Fed said the economy has regained traction and it would keep raising rates at a measured pace.
"There was no point at all in hinting at a pause, and it would have been hard to do given the economy is better than before," said Banc of America senior economist Peter Kretzmer.
TO PAUSE OR NOT TO PAUSE?
Futures contracts have priced in a pause, either in November or at the Fed's last meeting of the year in December, which would put the fed funds rate at 2.0 percent at the end of the year compared with 1.75 percent after Tuesday's move.
Futures markets show roughly a 50-50 chance that the central bank will raise rates by another 25 basis points at the November meeting.
The Reuters poll found 15 of 22 economists also expect the fed funds rate to sit at 2.0 percent by Christmas, with seven forecasting a rate hike in December.
"What the statement tells you is that they're comfortable the economy is doing well enough they can raise rates and they don't have to make a decision yet about how far up those rate hikes are going to go," said Avery Shenfeld, senior economist at CIBC World Markets (search).
There is a wide divergence of views about the Fed's path in 2005, with the economists polled seeing official rates anywhere from 2.0 percent to 4.25 percent at year's end.
The economist at the top end of that range, RBS Greenwich (search) chief economist Stephen Stanley, said he did not read the Fed's more conciliatory note on inflation in Tuesday's statement as a reason for pausing. The Fed noted inflation has "eased in recent months."
"Their concern isn't so much what inflation is now or a couple months from now," Stanley said. "It's always been a story about inflation a year out or two years out.
"When they say in the current situation inflation has eased, that doesn't mean they're still not concerned about what the implications may be from an accommodative policy down the road."
Indeed, numerous Fed officials in recent weeks have hammered home the message that the federal funds rate was simply "too low" for a growing economy, after it was slashed 13 times from 2001 to mid-2003.