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U.S. growth to be muted as doubts rise on Trump’s policy lift
April 20, 2017 / 2:33 PM / 6 months ago

U.S. growth to be muted as doubts rise on Trump’s policy lift

(Reuters) - U.S. economic growth will not achieve the new administration’s 3 percent goal this year or next, even if some fiscal stimulus and changes to tax laws are implemented, according to economists in a Reuters poll.

Those expectations surfaced amid doubts about President Donald Trump’s ability to push through such legislation after the defeat of the administration’s healthcare bill.

Having rallied to record levels on prospects of fiscal stimulus, the U.S. stock market and dollar have lost steam, while Treasury yields recently sank to a five-month low.

“Expectations around the size of the fiscal stimulus we would get in the United States were overdone coming into the year,” said Ethan Harris, head of global economics at Bank of America Merrill Lynch. “The markets are now converging to a more skeptical view on that.”

The poll of more than 100 economists during April 7-19 showed economic growth averaging 2.3 percent this year and 2.4 percent in 2018.

Suggesting confidence in the economy, however, economists raised their annualized forecasts for the second quarter to 2.7 percent from 2.4 percent in March’s poll. Third and fourth quarter medians held at 2.4 percent.

If recent history is anything to go by, though, economists could lower this outlook. They have generally been sanguine at the start of the year, only to become less optimistic later.

The forecasts in the latest poll reflect expectations for some tax changes and stimulus, according to almost three-quarters of the 40 economists who answered an additional question.

But the Federal Reserve has made clear it has not factored any fiscal impetus into its outlook.

Economists nonetheless expected a robust labor market to prompt the central bank to raise interest rates twice more this year.

After teeing the market for a rate hike in March, the Fed delivered one 25-basis-point increase, its second in three months, to 0.75-1.00 percent.

A few economists expected more than two additional rate hikes this year and quarterly annualized growth of around 3 percent. Still, fixed-income strategists in a separate Reuters poll said they did not see Treasury yields rising too high, underscoring skepticism about several rate increases. [US/INT]

“Very few people are expecting growth to be 3 percent,” said Jim O‘Sullivan of High Frequency Economics, who in 2016 became the top forecaster of U.S. economic data in Reuters polls for the second year in a row. “Even the 2 percent that we have been getting, of course, has been enough in the cycle to bring down the unemployment rate and to get the Fed to start the tightening cycle.”

If the Fed does raise rates even once more in 2017, this would be the first year in almost a decade that it would tighten twice.

The poll shows the Fed’s preferred inflation gauge, the core PCE price index, should reach the central bank’s 2 percent target toward year-end, with wage growth remaining lackluster.

The median expectation was for the index to average 1.8 percent annually this year and 2.0 percent next year.

While the Fed is unlikely to raise rates at its May meeting, markets are pricing in a little more than 45 percent probability of an increase in June, according to CME Fed Watch.

The poll predicted a 25 basis point hike in the second quarter and a follow-up increase in the fourth, taking the fed funds rate to a range of 1.25 to 1.50 percent.

“Unless the inflation numbers are much higher-than-expected, I don’t see any way the Fed would go more than once a quarter,” O‘Sullivan said.

The Fed may start laying out plans by year-end to scale back reinvestments in Treasuries and mortgage-backed securities to begin shrinking its $4.5 trillion balance sheet.

“Two more moves and then pause for balance sheet normalization in December is very realistic,” O‘Sullivan said. “Of course, markets are not quite pricing that in at this point.”

Polling and analysis by Hari Kishan and Anu Bararia; Editing by Lisa Von Ahn

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