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U.S. in modest recovery; Fed to cut back on QE next month: Reuters poll

A sign is shown in the window of a retail store in San Francisco, California in this file photo taken May 13, 2013. REUTERS/Robert Galbraith
A sign is shown in the window of a retail store in San Francisco, California in this file photo taken May 13, 2013. REUTERS/Robert Galbraith

By Ross Finley

(Reuters) - The U.S. economy is on a modest, yet sturdy recovery path that will bring down the jobless rate to 7 percent by the middle of 2014, leaving the Federal Reserve on track to ease off on its stimulus program next month, a Reuters poll of economists found.

While traders in financial markets have been fretting over when the Fed will pare back its $85 billion in monthly bond purchases, forecasters have remained convinced over past months that September is the time.

That is based partly on evidence that economic growth is accelerating modestly, and the narrowing spread of forecasts for the coming quarters in the latest Reuters poll reflects that conviction.

Jobs data have been the main disappointment, however, and the latest Reuters poll shows no significant improvement in expectations for hiring.

Indeed, anecdotal evidence shows that many companies have been doing whatever they can with existing staff and have been reluctant to re-hire aggressively until they have irrefutable evidence that the Great Recession is in the distant past.

But the existing steady pace of hiring will be enough - provided looming budget fights between Democrats and Republicans this autumn don't bring the government to a standstill - to allow the Fed to gradually taper off its extraordinary monetary easing.

"There is a material downside risk that political battles will lead to undue fiscal tightening which could depress the economy directly through reduced spending and indirectly through damaged confidence," said Bill Cheney, chief economist at John Hancock Asset Management.

"Barring such an outcome, I believe that the U.S. economy is ready to shake off its malaise and speed up quite rapidly."

Cheney is one of the more optimistic respondents in the Reuters poll, expecting the jobless rate to average 6.7 percent in the second quarter of next year. The consensus is 7 percent.

Economic growth is expected to accelerate to 2.2 percent in the current quarter, slightly weaker than last month's consensus. It is predicted to grow by 2.6 percent toward the end of 2013, picking up to 3 percent in a year from now.

Just under two-thirds of economists polled say the Fed will cut back on its quantitative easing program in September. That has been broadly steady now in several months of polling.

The consensus points to an initial $15 billion cut to the Fed's $85 billion monthly purchases of Treasuries and mortgage-backed securities, down from $20 billion in the July poll.

The poll also found that Janet Yellen is still seen as the most likely successor to U.S. Federal Reserve Chairman Ben Bernanke, despite a swell of speculation in recent weeks that Lawrence Summers might have the inside track.

The economists surveyed for the Reuters poll were from banks, research institutions and asset managers based in the United States, Canada and Europe.

(Polling and analysis by Hari Kishan and Shaloo Shrivastava in Bangalore Editing by W Simon)

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