Wall St sees Fed on track for rate hike in June despite tepid May jobs data: Reuters poll

By Richard Leong

NEW YORK (Reuters) - Wall Street's top banks are united in the belief the Federal Reserve will raise U.S. interest rates when it meets in two weeks' time, but recent choppy data on the U.S. economy has created a division of opinion about what happens after that, a Reuters poll showed on Friday.

A government report released earlier Friday showed a severe pullback in hiring in May, but it also showed a drop in the jobless rate to a 16-year low together with a decent rise in wages. This was seen as enough for Fed policy-makers to raise rates for the third time since last December as they seek to scale back monetary stimulus, according to the banks' economists.

"The overall report shows a continued tightening in labor markets and should help solidify the Fed's decision to hike rates in June," said Mark Doms, senior economist at Nomura Securities International, one of 23 U.S. primary dealers that do business directly with the Fed.

The 18 primary dealers surveyed on Friday expected the Fed to increase the target range on key overnight borrowing costs by a quarter point to 1.00-1.25 percent at its June 13-14 meeting.

As for the rate rise after that, 10 of the primary dealers expected the Fed to hike rates to 1.25-1.50 percent at its September meeting. Six others forecast a rate rise in December.

Questions arose as to when the central bank might increase rates again after June not just because of the mixed picture on labor conditions, but also due to softening inflation and disappointing vehicle sales.

The core price index on personal consumption expenditure, the Fed's preferred inflation gauge, slowed to 1.5 percent in the 12 months through April, according to a government report on Tuesday. That was smallest year-over-year gain since December 2015 and below the Fed's 2-percent goal.

Industry data released on Thursday showed auto sales stalled below an annualized pace of 17 million units for a third straight month in May.

All of the primary dealers surveyed expected the central bank to announce by year-end its plan to begin shrinking its $4.5 trillion balance sheet with a scaling back of reinvestments in Treasuries and mortgage-backed securities.

Six of the 18 said the Fed may detail its balance sheet normalization at its September meeting, while the rest thought it would wait until December.

The dealers' views regarding a pending rate hike is shared among traders in the bond market.

On Friday, interest rates futures implied traders priced a 96 percent chance of rate increase in less than two weeks while they suggested they saw only a one in four chance of another hike in September. The chances of such a move in December were seen essentially as a coin toss.

"We are going to get this one tightening in June. Then we are going to be completely data dependent," said Brian Edmonds, head of rates trading at Cantor Fitzgerald, a primary dealer.

(Reporting by Saqib Ahmed, Karen Brettell, Sinead Carew, Sam Forgione, Richard Leong, Chuck Mikolajczak, Dion Rabouin and Caroline Valetkevitch; editing by Chizu Nomiyama)