Top U.S. forecasters have bumped up economic growth and inflation forecasts for this year and predicted the Federal Reserve will raise interest rates several times by early 2005, a survey out on Thursday showed.
In its latest poll of more than 50 professional economic forecasters, the closely watched Blue Chip Economic Indicators newsletter said expectations for faster growth and rising price pressures made a June rate hike by the Fed a near certainty.
"News of a third consecutive blowout month for employment gains in May -- released after completion of our survey -- will only further serve to solidify economists' belief that the expansion is now both strong and self-sustaining," the newsletter said, referring to a gain of 248,000 jobs last month.
"But faster job growth also seals the case for a tightening of policy by the Federal Reserve. Monetary policy is now far too accommodative and the Fed needs to act against emerging inflationary pressures," it added.
The survey found panelists expected U.S. gross domestic product to surge 4.7 percent this year -- its best performance since 1984 -- up from a 4.6 percent forecast a month ago, as job growth bolsters confidence and props up consumer spending while even the cooling housing market holds up well.
The forecast for 2005 growth dipped to 3.7 percent, down 0.1 percentage points from the month-ago projection.
The panel ramped up expectations for inflation, as measured by the Labor Department's Consumer Price Index, to 2.3 percent from 2.1 percent in May, the fourth straight monthly upgrade.
Panelists believe Fed policy-makers will "almost certainly" raise overnight borrowing costs by a quarter of a percentage point at the close of their June 29-30 meeting and expect rates to be a total of 75 to 100 basis points higher by early 2005.
The fed funds rate currently stands at a 1958 low of 1 percent, but the panel said borrowing costs will likely triple by the end of next year to 3 percent or more.
Long-term borrowing costs such as mortgage rates are also expected to rise, weighing on activity in the housing sector. But the panel said the rise in long-term yields will be mitigated if inflation levels off and the Fed succeeds in convincing markets it will fight rising prices.
Fed Chairman Alan Greenspan said on Tuesday the U.S. central bank expects to raise interest rates gradually, but is ready to do "what is required" to keep inflation in check if the economic forecast behind its view proves wrong.
Inflation aside, the panel said the economic outlook was bright, with robust consumer spending largely unhindered by high gasoline prices. Growth in capital spending in the second quarter should top the solid first-quarter pace, while manufacturing "is on a tear."
Real personal consumption expenditures were forecast to grow at a 3.5 percent rate in the second and third quarters, slowing to 3.2 percent in the final three months of 2004.
Real disposable income is seen rising by 3.9 percent this year, easily surpassing last year's 2.6 percent gain, despite the dampening effect of larger-than-expected price rises on inflation-adjusted income growth, the newsletter said.
"It's hoped that faster job creation will boost wage and salary gains, offsetting some of that inflationary impact as the year (progresses)," it said.
Pre-tax profits are expected to increase 17.6 percent this year, while nonresidential fixed investment was forecast to grow 9.7 percent. Both estimates were slightly lower than month-ago projections.