There is a good chance the Federal Reserve will raise interest rates before the end of 2014, according to a Reuters poll which also showed a significant minority of economists still expect a further easing of monetary policy in coming months.
The poll saw a 50-50 chance the U.S. central bank will break the pledge it made last month to keep benchmark overnight borrowing costs at near-zero for the next two years.
While there was little material change to the growth outlook from a poll last month, it is clear that analysts have become more optimistic about the prospects for the world's largest economy.
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One reason for optimism is the fact that American corporations, which have begun to hire workers at a more brisk pace in recent months, are sitting on enormous piles of cash.
"While consumers are still trying to delever and get themselves in a better position, corporations are a lot better positioned than they were before, so it's not going to take much to spark the economy once things get going," said Sam Bullard, a senior economist at Wells Fargo in Charlotte, North Carolina.
Wells Fargo Securities sees the odds of a rate hike before late 2014 at 70 percent.
A surprisingly strong run of economic data — from jobs growth to manufacturing activity — has led many economists to dial down their expectations for a third round of Fed bond buying, while raising questions about whether the central bank can wait until late 2014 to tighten monetary policy.
The Fed has held rates close to zero since December 2008 and has bought $2.3 trillion in bonds to drive other borrowing costs lower. Fed Chairman Ben Bernanke said last month that the central bank was considering further asset purchases.
The poll, however, put the odds of any more such purchases at 35 percent. A month ago, economists were evenly split on whether or not there would be another round.
Still, there are several institutions, including Goldman Sachs, Societe Generale and Jefferies, that see a high probability of further easing and little chance of a rate hike before late 2014.
HOUSING PAIN LINGERS
"Certain Fed officials, including Bernanke, are still very worried about the overall pace of the recovery and in particular the lack of a turnaround in the housing market," said Paul Ashworth, chief U.S. economist at Capital Economics in Toronto.
The housing market, the main trigger of the 2007-09 recession, has shown little signs of life and home prices continue to tumble. Bernanke has singled it out as one of the main obstacles to faster economic growth.
Even after collapsing by more than a third from their peak, U.S. house prices aren't expected to rise at all this year, according to a Reuters poll conducted last month.
While economists at Wells Fargo see a high chance of interest rates rising before late 2014, they also see the odds of a third round of money printing, or quantitative easing, at 70 percent, possibly as soon as the Fed's next meeting in March.
"They (Fed) are unconvinced that this recent pick-up in data is going to sustain and then of course there is Europe and its risks as well," said Bullard.
"If they want to help the housing market, they would want to do it sooner rather than later, given that we are coming up on the spring buying season."
The survey forecast U.S. economic growth will slow to an annual rate of 2.0 percent in the first quarter, unchanged from a January survey, after a 2.8 percent clip in the last three months of 2011.
Growth at the close of last year was boosted by a large build-up in inventories, which is expected to weigh on the economy in the current quarter.
Europe's sovereign debt crisis remains a huge threat to the financial system and is expected to dent U.S. exports to the euro area. The Reuters poll predicted a recession in the 17-member zone, albeit a mild one.
A burst in consumer spending in late 2011 was funded from savings, so some economists look for a moderation.
Some analysts also think recent solid data could partly reflect a temporary lift to activity from unseasonably warm winter weather but they generally acknowledge that it also points to a genuine improvement.
"At the moment, everything seems to be going the right way for the U.S. economy. Given the encouraging signs of data, I suspect it would be hard at this point to try and justify doing anything else for the time being," Capital Economics' Ashworth said.
Employers added 243,000 new jobs in January, the most in nine months, and the jobless rate dropped to a three-year low of 8.3 percent. In manufacturing, activity picked up for a third straight month in January, with a growing backlog of orders suggesting the strength would be maintained.
The survey forecast inflation pressures would remain fairly contained. Core consumer prices, which exclude volatile food and energy costs, are forecast to rise by an average 1.9 percent this year, unchanged from the January survey. That rate is just below the Fed's 2 percent target.
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