The U.S. economy will grow faster later this year and the Federal Reserve will raise short-term interest rates at least three times, according to a survey of economists by The Wall Street Journal.
They predicted the annual growth rate of the U.S. economy will speed up to 2.8 percent this year from 2.5 percent in the fourth quarter of 2017 because of tax cuts approved by President Donald Trump. A boost in hiring will push the unemployment rate to less than 4 percent by midyear from 4.1 percent in January, the survey found.
Trump ran on a pro-business platform of cutting taxes and regulation while spending $1 trillion on infrastructure like roads and bridges. In December, Trump approved a sweeping tax reform bill that cut corporate tax rates and urged companies to transfer trillions of dollars held overseas back to the U.S.
The economists surveyed by The Wall Street Journal expect the Fed to raise rates at its March 20-21 meeting, followed by another hike at its June 12-13 meeting. The central bank in December raised its target rate to a range of 1.25 percent and 1.5 percent. Economists expect the rate to reach 2.2 percent by year-end.
Economists were upbeat about the outlook even after the U.S. stock market declined by 10 percent from a January peak. The average chance of a recession in the next year rose to 14 percent from 13 percent in January’s survey.
“The tax-cut stimulus and faster wage and salary growth are the garlic to the vampire of recession,” Sean Snaith, director of the University of Central Florida’s Institute for Economic Competitiveness, told the WSJ.
Larry Kudlow, the Reagan administration economist who advised the Trump campaign, said the White House needs to tout the strength of the U.S. economy as the stock market twists through a spell of volatility.
The Dow Jones Industrial Average, which President Trump celebrated every time it rose another 1,000 points, surged 45 percent after the election to an intraday peak of 26,616.7 last month. The benchmark later fell as much as 10 percent by February 5, erasing gains for the year.
The sell-off was most sudden after the Bureau of Labor Statistics reported strong wage growth for January, triggering fears of inflation and more rate hikes from the Federal Reserve to cool an overheating economy. But the sell-off wasn’t the worst in U.S. history, compared with the crashes in 1929 and 1987.
“During the 1987 crash, Reagan went out there and said that the economy is fundamentally sound. And he was right, and the market rebounded,” Kudlow said on cable channel CNBC. “If I were on the Trump team, I would talk about that. And in fact, the economy is improving.”
St. Louis Federal Reserve President James Bullard on Tuesday said recent labor market strength may not lead to faster price increases, contrary to investors whose inflation fears have pushed stocks lower.
"I caution against interpreting good news from labor markets as translating directly into higher inflation," Bullard told a conference in Lexington, Kentucky. "Let's wait and see what happens."
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