The U.S. Federal Reserve will start raising interest rates in the fourth quarter of this year as the jobs picture improves gradually, according to the median forecast of big banks that do business directly with the U.S. central bank.
The recent poll of primary dealers was conducted after government data showed the U.S. economy unexpectedly lost jobs in January even as the unemployment rate dropped to 9.7 percent — a five-month low.
Six dealers changed their forecasts for the level at which the U.S. jobless rate would peak, compared to a Jan 27 poll.
Many economists had expected unemployment to rise for a while as discouraged workers re-entered the labor force. The poll showed dealers — according to the median forecast — expect the jobless rate to have already peaked at 10.1 percent.
The jobs report did not change dealers' view of when the Fed will raise its policy rate from near zero levels, however. Seventeen of the 18 primary dealers in the Fed's network responded to the Reuters poll.
"We don't think this is going to change the Fed's stance," said Thomas Simons, money market economist at Jefferies & Co in New York. The jobs data is "not good, but it's better than where it was," he said.
A number of dealers said the Federal Reserve will want to see evidence of a sustained recovery in the labor market before tightening monetary policy.
"They will be looking for a consistent decline in the unemployment rate and a return to fairly robust job growth," said Dean Maki, chief U.S. economist at Barclays Capital in New York.
Nine out of 17 dealers expect the Federal Reserve to start raising rates this year.
The Federal Reserve cut its benchmark interest rate to near zero in December 2008 and has pledged to keep rates extraordinarily low for "an extended period."
Dealers expect the Fed to change this pledge one or two quarters before it begins to raise rates.
Dealers polled did not expect the Federal Reserve to extend its $1.25 trillion mortgage-backed securities purchase program beyond a planned March 31 end date.
"I think that they probably would resist. The government can use other means to help that industry," said Brian Fabbri, chief North America economist at BNP Paribas in New York.
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