The Federal Reserve left short-term interest rates alone in May, but don't go away: It's still likely to raise them twice more before the end of the year.
The most probable times, according to Bank of America (BAC) economists, are in September and December. Their prediction on the number of hikes, if not the timing, jibes with both central bank projections and interest-rate futures trading that suggest a range of 1.25% to 1.5% by the end of the year, compared with 0.75% to 1% now.
"If financial conditions remain supportive for growth, if there isn't significant market volatility, I think the Fed will be comfortable raising rates in the second half," Bank of America economist Joseph Song said in a telephone interview Wednesday.
While inflation is still lagging behind the Fed's target of 2%, the unemployment rate dropped to just 4.5% as of March -- less than half its 2009 peak during the financial crisis and better than estimates of sustainable long-term levels -- and financial markets are trading near record highs. That gives the central bank room to pull away from interest rates that were cut to nearly zero in 2008 and remained there for seven years, Jan Hatzius of Goldman Sachs (GS) wrote in a note to clients.
For now, the economy is likely to continue evolving "in a manner that will warrant gradual increases" after solid job gains and firming capital investments by business, the Fed's monetary policy committee said in a Wednesday statement disclosing its unanimous decision on rates.
The central bank highlighted its assessment that first-quarter economic expansion of just 0.7%, the weakest in three years, was likely transitory. Morgan Stanley (MS) is predicting gains of 3.8% in the three months through June, economist Ellen Zentner said in a note to clients, and if incoming data backs that up, the central bank will likely boost rates at its mid-June meeting.
