By Sam Forgione
NEW YORK (Reuters) – A majority of Wall Street’s top bond firms see the Federal Reserve starting to raise interest rates by the second quarter of next year, showing slightly more aggressive expectations compared with a month ago, a Reuters survey showed on Friday.
Nine of 17 primary dealers, the banks that deal directly with the Fed, said the U.S. central bank’s first rate increase would occur in the second quarter of 2015, the survey found.
In a survey taken in early August, six of 19 dealers had expected such a move.
All but five of the 22 primary dealers participated in the latest survey.
The view that the Fed has accelerated its timeline for raising rates came even after Friday’s monthly employment report, which showed that U.S. employers hired the fewest number of workers in eight months in August and that more Americans gave up the hunt for jobs.
Nonfarm payrolls increased 142,000 last month, missing economists’ median expectation of a gain of 225,000, after expanding by 212,000 in July.
“This jobs report is effectively meaningless for Fed policy. It’s one weak month, but the trends still look healthy. We don’t really see a big issue there,” said Drew Matus, an economist at UBS in New York.
Fed Chair Janet Yellen said in a speech at an annual conference in Jackson Hole, Wyoming, on Aug. 22 that the U.S. central bank should move cautiously in deciding when to raise interest rates given that the country’s labor market remains bruised from the Great Recession. The Fed’s next policy meeting will be held on Sept. 16-17.
In the survey, eight of 15 Wall Street firms expected the Fed would stop reinvesting the proceeds from maturing bonds it holds on its roughly $4.5 trillion balance sheet in 2016, with six of those believing the halt would occur in the first quarter of that year.
The number of Wall Street firms that expected the halt in reinvestments to occur in 2016 was slightly fewer than it had been in early August, when nine of 16 dealers expected the move to occur in 2016.
FED FUNDS SEEN TOPPING OUT AT 3.75
The median forecast among dealers for the federal funds rate at the end of next year was 1 percent, while the median forecast for the end of 2016 was 2.50 percent. The median forecast for the federal funds rate’s upper limit was 3.75 percent.
Since December 2008, the Fed has targeted a range of zero to 0.25 percent for its key funds rate.
Among 14 primary dealers, the median forecast for the Fed’s long-term neutral target rate, which is seen as a level that promotes growth without stoking inflation, was 3.50 percent. This was below the current 3.75 percent estimate from Fed officials, based on their median June forecast.
(Additional reporting by Michael Connor, Gertrude Chavez-Dreyfuss, Daniel Bases, Ryan Vlastelica, Sam Adams, Akane Otani and Richard Leong in New York; and Hari Kishan and Kailash Bathija in Bangalore; Editing by Leslie Adler)
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