Higher interest rates are at least nine months away, according to a growing number of economists at Wall Street's largest bond-trading firms. The Federal Reserve will wait until 2005 to raise its key interest rate from 1 percent, said economists at 10 of the 23 primary U.S. government securities dealers, which trade with the central bank, surveyed by Bloomberg News. In December, just six economists said the Fed would wait that long.
Citigroup Inc., the world's biggest financial-services company, pushed its forecast into 2005 from August after the U.S. last month added about one-sixth of the 130,000 jobs economists had predicted. February was the fourth straight month in which job growth fell short of forecasts. Morgan Stanley, Deutsche Bank Securities Inc. and nine other firms now say a rate increase will come later than in their January forecasts. Twelve of the firms said the Fed will lift rates this year. ``All the market cares about is the payroll numbers,'' said Joseph LaVorgna, chief U.S. fixed-income economist at Deutsche Bank in New York. ``Until we see a string of good reports, the Fed won't start'' lifting interest rates, said LaVorgna, 35, who revised his prediction to August from June. The economy has shed 2.3 million jobs since President George W. Bush took office in January 2001, including 1.07 million since the economic expansion began in November 2001. Unless the shortfall is made up by the November election, Bush will become the first president since Herbert Hoover to end a term with fewer jobs than when he started.
The February employment report that was released on March 5 sparked the biggest three-day gain in 10-year Treasury notes in 19 months. Economists at Bear Stearns & Co. had the biggest shift, lowering their year-end rate to 1.75 percent from a 2.5 percent forecast in January.
`Not at Risk'
Fed policy makers have kept their target for overnight loans between banks, or federal funds, at the lowest since July 1958 since June to spur business investment and prevent inflation from slowing. Falling prices keep a lid on profit margins and acts as a deterrent to hiring. Economists at all 23 primary dealers said the Fed will leave its key interest rate unchanged when it meets on Tuesday. Kathleen Bostjancic at Merrill Lynch & Co., Michael Moran at Daiwa Securities America Inc. and Dana Johnson at Banc One Capital Markets Inc. are among those who said policy makers may acknowledge that the risks from slowing inflation have ebbed. In December, the Fed dropped its warning about disinflation from its policy statement, saying risks are evenly balanced between rising prices and slowing economic growth.
Optimistic Outlook
``They may make it clear that the economy is not at risk of disinflation any longer,'' said Bostjancic, a senior economist for Merrill in New York. ``Investors should not read further into that. It doesn't mean that inflation is accelerating fast.'' Core consumer prices, which exclude food and energy, increased 0.2 percent in January after a 0.1 percent rise in December. For all of 2003, core prices rose 1.1 percent -- the smallest gain since 1960. Fed Chairman Alan Greenspan said Thursday the U.S. economy is showing ``increasing signals of recovery'' that should boost job growth soon. ``Employment will begin to increase more quickly before long as output continues to expand,'' Greenspan told the House Committee on Education and the Workforce.
``We must see sustainable job growth,'' said Brian Fabbri, chief economist at BNP Paribas in New York. ``If we see 150,000 jobs created, on average, for say three months -- that would be enough.'' Fabbri, who at 2 percent has the highest year-end forecast, now expects a rate increase in August, compared with May in the January survey.
`Some Improvement'
The yield on the two-year note, among the securities most sensitive to changes in monetary policy, has fallen to 1.48 percent from 1.83 percent on Jan. 8. The difference between the yield and the Fed's target rate is 0.48 percentage point, down from 1.09 percentage points on Dec. 1, which was the widest since July 2002. ``Another three or four bad payroll reports and the Fed will have to'' delay any rate increase, said James O'Sullivan, a senior economist at UBS Securities LLC in Stamford, Connecticut. ``We may see some improvement in the next couple of months'' and a rate increase in August, a forecast the firm has maintained since October, said O'Sullivan, 40. UBS is one of five firms expecting the Fed to lift rates at its Aug. 10 meeting.
`Spillover'
After growing at a 6.1 percent annual rate in the second half of last year -- the fastest six months since 1984 -- the world's largest economy will expand 4.6 percent this year, according to the median estimate of 68 economists surveyed by Bloomberg News between Feb. 27 and March 8. ``Despite the lag in jobs creation, we don't see it having a spillover effect in the level of consumer spending,'' said Deutsche Bank's LaVorgna. ``The economic recovery is not at risk at this point.'' Low interest rates haven't caused inflation to accelerate, another reason the Fed can postpone raising rates as the economy expands, said economists including Ian Morris at HSBC Securities USA Inc. ``While the labor market is not showing signs of a rebound, the inflation rate has been so low that it offers even more support for the Fed to keep rates at the present levels,'' Morris, 35, said.
HSBC said policy makers will leave the fed funds target unchanged until the second half of next year, placing the firm with Merrill Lynch in predicting the longest wait for a rate increase. ///www.bloomberg.com