A majority of business economists believe the Federal Reserve will end its asset purchases in the last quarter of this year, with 40% saying they expect the first hike in the Fed Funds rate to come in the first half of 2015, the latest survey from National Association of Business Economists shows.
The March 2014 NABE Outlook survey, which encompasses the consensus of 48 macroeconomic forecasts, shows 57% believe asset purchases will end in the fourth quarter of 2014, in line with current Fed guidance.
One quarter of respondents expect the large scale asset purchases will end prior to the fourth quarter, while 17% expect the asset purchase program will extend beyond 2014, although only 2% say it will persist into 2016 or later.
“The NABE Outlook Survey panelists anticipate the Federal Reserve will continue to taper its long-term asset purchases throughout 2014, with the majority of the panel expecting purchases to end entirely in the fourth quarter,” Survey Chair Timothy Gill, deputy chief economist at the National Electrical Manufacturers Association said in a statement.
While the estimate for the end of asset purchases is in line with the Federal Open Market Committee’s latest communication that tapering is likely to continue in measures steps with the program ceasing before the end of the year, the expectation of rate liftoffs in the first half of 2015 seems to be a bit earlier then the Fed is signaling.
In the NABE survey, more than half (53%) expect a hike in the Fed Funds rate in 2015, but 40% expect it in the first half and just 14% expecting it in the second half. One third of respondents still expect a lift off from the zero lower bound this year, and 17% expecting an increase to take place in 2016 or later.
Fed Chair Janet Yellen, in her press conference Wednesday, mentioned a six-months lapse from the end of LSAPs to the beginning of rate hikes, which would point to a hike in the third quarter of 2015.
St. Louis Fed President Bullard then said Friday: “That wasn’t very different from what we had heard from financial markets, so I think she’s just repeating that at that time period.”
Overall, the survey expects the Fed Funds rate to be at its current zero to 0.25% range at the end of this year, and then climb to 0.75% at the end of 2015.
The median of the five lowest individual forecasts has the rate remaining unchanged from its current target through 2015. Meanwhile, the median of the five highest individual forecasts puts the rate target at 1% at the end of 2014 and 2% at the end of 2015.
“Higher interest rates also appear to be in the cards, as one-third of respondents expect a hike in the federal funds rate this year and more than half forecast an increase in 2015,” Gill said.
“Indeed, panelists name rising interest rates as the biggest threat to the economic expansion over the next two years,” he said. “Even so, when asked to estimate the probability of a recession in the next two years, the median response was only 15%.”
The NABE survey shows the yield on the 10-year Treasury note is expected to rise to 3.3% at the end of 2014 and 3.8% at the end of 2015. The 10-year Treasury yield closed 2013 at 3.04%.
The survey also showed panelists upped their forecasts for GDP this year. Even with an expected a 0.4 percentage point subtraction from real GDP in the first quarter due to adverse winter weather, the annual GDP growth in 2014 is expected to be 2.8%, stronger than the 2.5% projected in December’s survey.
“Despite a challenging start to the year in which adverse weather conditions will likely shave nearly one half of one percentage point from first-quarter real GDP growth, NABE’s March 2014 Outlook Survey panel expects the pace of economic expansion to accelerate this year-and next,” said NABE President Jack Kleinhenz, chief economist of the National Retail Federation in the statement.
On an annual average basis, real GDP growth is forecasted to increase from 1.9% last year to 2.8% this year, and to 3.1% in 2015.
On a fourth quarter to fourth quarter basis, however, current expectations are slightly lower than in December. By either measure, panelists forecast economic growth to accelerate to over 3% in 2015.
“The consensus of the panelists is that real GDP will advance at a weak 1.9% annualized rate in the first three months of the year but pick up by year end to a pace of more than 3%,” Kleinhenz said.
Helping GDP growth is a stronger forecast for consumer spending. Personal consumption expenditures are forecasted to increase 2.6% in 2014, higher than the 2.4% projected in the December survey. Consumer spending is projected to rise 2.9% in 2015.
“Conditions in a variety of areas – including labor, consumer, and housing markets – are expected to improve over the next two years, while inflation remains tame,” Kleinhenz said.
As for employment, the NABE survey show further labor market recovery is anticipated. Nonfarm payrolls are forecasted to post an average monthly gain of 188,000 for all of 2014, slightly below the 194,000 recorded last year, the survey showed. Panelists anticipate stronger job creation of 205,000 per month in 2015.
The unemployment rate is expected to average 6.4% in 2014, down a full percentage point from 2013, and decline to 6.1% in 2015.