Prospects for the U.S. economy this year have dimmed slightly over the past month, leaving the central bank plenty of room before having to consider tightening policy, a Reuters poll showed on Thursday.
After a slower start to the year than had been anticipated, economists have revised up expectations for the second quarter but trimmed their growth outlook for the final months of the year, according to the poll taken over the past week.
A surge in commodity prices in recent months has tested the Federal Reserve's resolve to maintain its ultra-accommodative stance until the economic recovery is in full swing.
Indeed, one of the biggest risks is the potential for commodity prices to rise even higher, which could cut into spending plans for businesses and consumers, said economists, who as a group revised up their inflation forecasts by at least 0.3 percentage points for all quarters until April 2012.
"The second half of the year should be stronger, assuming oil prices don't go much higher than where they are today," said Kurt Karl, chief U.S. economist at Swiss Re in New York.
The second-quarter gross domestic product consensus forecast was raised to an annualized 3.3 percent from 3.2 percent. That is up sharply from the 1.8 percent rate reported for the first quarter, which could be revised higher.
Consensus forecasts for Q3 held steady at 3.3 percent, but Q4 was trimmed to 3.4 percent from 3.5 percent and the full-year average to 2.7 percent from 2.9 percent.
Economists are now considerably more pessimistic about growth after data released last month showed first quarter GDP expanded at a 1.8 percent annualized rate, below economists' expectations for 2 percent growth.
A like-for-like comparison between May and April polls shows 53 of 63 common contributors downgraded their growth outlook for 2011, while nine left their forecast unchanged and one upgraded.
The Fed — as well as economists in the poll — generally views the impact of higher prices as temporary.
That said, last week's abrupt drop in commodities likely came as a relief to many. U.S. crude futures are trading at around $98 a barrel, down sharply from more than $114 at the start of the month.
Expectations for core inflation, which strips out prices of volatile items such as food and gasoline, are still below the Fed's unofficial threshold of 2 percent.
The latest Reuters poll predicted the consumer price index averaging an annual 3.2 percent rise in the second quarter, up from the 2.9 percent consensus forecast last month.
For the year, inflation is seen averaging 3.0 percent, up from earlier expectations of 2.7 percent.
Core inflation is also seen ticking up but the overall rate is more subdued. The consensus for core inflation was unchanged at 1.3 percent for the second quarter, but rose to 1.4 percent in the third and 1.6 percent in the fourth quarter. That is up from 1.3 percent and 1.5 percent, respectively.
Overall, inflation remains tame, especially compared with emerging markets, and economists do not see the Federal Reserve raising interest rates until the beginning of 2012.
In that sense, the Fed has fallen behind other central banks, including the European Central Bank, which have already begun to tighten.
Recent comments from Fed officials, including Chairman Ben Bernanke, suggest the central bank is in no rush to scale back its support for the economy.
Economists in the poll tended to agree.
"We expect an acceleration in growth in the second half of 2011, and eventually a normalization in monetary policy conditions in the first quarter of 2012, which will translate into a broad decline in commodity prices," said Diane Swonk, economist at Mesirow Financial.
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