Most major U.S. economists expect the Federal Reserve to hold interest rates at the current level near zero through the end of the year despite signs of rising inflation, a Reuters poll found Wednesday.
Fed Chairman Ben Bernanke said in a press conference following a central bank policy meeting that while rising oil prices were forcing a pickup in inflation, those price pressures were expected to be transitory.
"All his press conference did was reinforce that core members of the Fed are holding to the notion that it is unnecessary to lift the funds rate anytime soon," said Tom Porcelli, chief U.S. economist at RBC Capital Markets in New York. "Until you see inflation expectations come unhinged, they will be emboldened to keep the funds rate at a low level."
Of the 20 primary dealers — the large financial institutions that do business directly with the Fed — only two of the 17 dealers who answered the poll expect the central bank to increase interest rates before the end of 2011. That was unchanged from a similar poll conducted on April 1.
The Fed Wednesday raised its estimate for 2011 inflation to a range of 2.1 percent to 2.8 percent, boosted by a surge in oil prices.
However, the central bank said in its policy statement that "inflation has picked up in recent months, but longer-term inflation expectations have remained stable and measures of underlying inflation are still subdued."
The Fed also reiterated it plans to keep official interest rates at the current range of zero to 0.25 percent for an "extended period."
"It reaffirmed the current policy stance that policy remains accommodative and the majority of the committee gave no ground to the more vocal (inflation) hawks on the committee," said Kevin Logan, economist at HSBC Securities USA in New York, adding "it is still clear the majority of the committee is committed to an accommodative stance for an extended period."
The Fed also Wednesday after its two-day policy meeting said it intends to end its latest, $600 billion bond-buying program — known as QE2 — in June as scheduled and said it would not let its balance sheet run down immediately.
Most economists felt that left very slim chances of another round of Treasuries purchases any time soon.
Of the 16 primary dealers who answered a question about the chances of a "QE3" program in the next two years, only one ascribed a 25 percent chance of such a program, while the remaining 15 gave it less than a 25 percent chance.
"The bar for is very very high for (QE3), so the odds of it happening are very low," said Bulent Baygun, head of U.S. interest rate strategy at BNP Paribas in New York.
The looming end of the current Treasuries purchase program is not expected to have a large impact on U.S. Treasury note yields, with the median of forecasts calling for the benchmark 10-year Treasury note to be 3.60 percent at the end of June, up only marginally from Wednesday's trade level of 3.36 percent.
The median of forecasts for the 10-year yield at the end of the second quarter was 3.61 percent in the April 1 poll.
The economists also gave Bernanke high marks for his performance in the post-meeting press conference, which was the first of its kind for a Fed chairman. The lowest grade from 13 of the primary dealers who answered the question was "B" grade, with most of the economists giving Bernanke an "A" or "A minus" grade.
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