Wall Street's biggest banks remain convinced the Federal Reserve will raise interest rates by June 2015, a Reuters poll found, and economists also said the market was underestimating how aggressively the U.S. central bank will tighten policy.
Fourteen of 19 primary dealers, or the banks that deal directly with the Fed, said they expect the first rate hike by June 2015, with borrowing costs rising to 1 percent at the end of that year.
The survey results show that Wall Street's top economists were unmoved by a volatile sell-off last month and an October Fed statement that was viewed as hawkish.
In a survey taken in early October, 15 of 19 primary dealers also said the Fed would raise interest rates in June. Even in a separate survey done after stocks tumbled in a volatile week of trading last month, 24 of 47 economists still predicted a June rate hike.
The latest view, that the Fed would raise rates in seven months, comes after a strong October jobs report on Friday. The U.S. economy added 214,000 jobs in October, the Labor Department said, and the unemployment rate fell to a six-year low at 5.8 percent even as more people entered the labor force, a sign of a strengthening and resilient economy.
Eleven of 14 economists at these dealers also said the Fed will increase rates more aggressively than traders in the bond markets were pricing in U.S. short-term interest rates futures Friday. Fed funds futures contracts on Friday suggested traders were pricing in a 34 percent probability of a rate hike for June 2015 and a 63 percent probability in September 2015.
All but three of the 22 primary dealers participated in the latest survey.
The market selloff last month pushed some measures of U.S. inflation lower, prompting investors to push back expectations of the first Fed rate increase to late in 2015 and even into 2016.
But markets quickly recovered and, last week, the central bank issued a confident-sounding policy statement following its October meeting that expressed confidence in the U.S. economic recovery even as concerns mount over weak global growth. It also said underutilization of labor market resources was "gradually diminishing."
"The further drop in the unemployment rate does put a bit of pressure on (the Fed)," said UBS Securities economist Samuel Coffin. "It's pretty clear their change in tone on the labor market is coming a bit true - there is less slack."
The median forecast of 18 dealers for the federal funds rate at the end of next year was 1 percent, compared with the median forecast of Fed policymakers of 1.38 percent, according to projections from the central bank's October meeting.
The median forecast of 14 dealers for the federal funds rate at the end of 2016 was 2.5 percent, compared with policymakers' median forecast of 2.88 percent. By the end of 2017, 10 primary dealers projected a median federal funds rate of 3.5 percent, while policymakers' median forecast was 3.75 percent.
Since December 2008, the Fed has targeted a range of zero to 0.25 percent for its key funds rate.
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