By Chris Reese
NEW YORK (Reuters) - Most leading economists do not expect the U.S. Federal Reserve to increase interest rates this year, despite forecasts of rising inflation and after further evidence of a recovering jobs market, a Reuters poll found on Friday.
Data on Friday showing a second month of solid employment growth in March still portrayed an economy that is weak enough to keep the central bank on hold through 2011, the majority of economists at primary dealers said.
Sixteen of 18 primary dealers expect the Fed to hold rates at the current level near zero through 2011, which was unchanged from a similar poll conducted on March 15.
Two of the 20 primary dealers -- the large financial institutions that do business directly with the Fed -- did not reply to the poll.
The Reuters' survey was conducted on Friday after the government said non-farm payrolls grew by 216,000 last month, which was the largest gain since May, while the unemployment rate dipped. Within the report however, average earnings per hour remained flat for a second month in a row.
"Today's employment report marks the second consecutive month of strong payroll growth and the fourth straight month of falling unemployment -- if we continue to see reports like this, the Fed could tighten as early as Q1 2012," said Neil Dutta, an economist at Bank of America Merrill Lynch in New York.
"The fly in the ointment in today's report was weak wage inflation, which means it is still probable that the Fed goes later relative to current market expectations. Finally, it is too early, in our view, for employment data to be impacted by either the oil shock or the supply-chain disruptions from Japan. Therefore, the risk is that this trend stalls in classic spring 2010 fashion," Dutta said.
Rising food and energy costs have caused economists to ratchet up their expectations for inflation, with the median of forecasts from the 18 primary dealers rising to 2.6 percent for the headline consumer price index on a year-over-year basis in 2011, from 2.3 percent in the March 15 poll.
Still, the Fed focuses on core inflation, which does not include food and energy prices, and the central bank was not expected to be hit by undue pressure from rising prices.
"We started this quarter thinking we were going to get 3.5 percent growth in the quarter, and now our tracking model is saying we will be lucky to get 2.5 percent, and that is despite these employment gains and other things," said David Resler, chief economist at Nomura Securities International in New York.
"The employment gains are good, but behind these employment gains are very weak wages, there is simply no evidence that you are going to get a wage pressure-driven inflation, and without that it is very hard to get a significant increase in core inflation -- it does not imply a need for a rise in rates," Resler said.
The majority of forecasts for steady rates this year came despite hawkish talk from some Fed officials this week, who focused on the potential for Fed policies to fuel inflation. However, one of the Fed's most powerful policy makers, New York Fed President William Dudley, on Friday said there was no need for the U.S. central bank to reverse course.
None of the 18 economists from primary dealers said they expect the Fed to end its current program of Treasuries purchases early, or to extend it. Under the program, the Fed is scheduled to buy $600 billion of Treasuries and Treasury inflation-protected securities through the middle of 2011.
Economists have recently been reeling in their expectations for U.S. growth. The median of forecasts from the 18 primary dealers was for year-over-year gross domestic product growth of 2.95 percent in 2011, down from a median of 3.20 percent in the March 15 poll, in which 17 of the 20 primary dealers responded.
(Additional reporting by Pam Niimi: Editing by Leslie Adler)