Analysis: Fed Likely to Push Back on Market Expectations of Rate Increase.# Stock
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http://blogs.wsj.com/economics/2013/06/13/fed-likely-to-push-ba
By Jon Hilsenrath
Federal Reserve officials have been trying to convince investors for weeks
not to overreact when the central bank starts pulling back on its $85
billion-per-month bond-buying program. An adjustment in the program won’t
mean that it will end all at once, officials say, and even more importantly
it won’t mean that the Fed is anywhere near raising short-term interest
rates.
Bloomberg News
Fed Chairman Ben BernankeInvestors aren’t listening.
A wide range of indicators suggest that investors are starting to think the
Fed might start raising short-term interest rates — now near zero — sooner
than previously thought. Until recently many market indicators suggested
investors expected the first rate increases in mid-2015, but now these
indicators indicate investors think it could be sooner.
Prices have been dropping in Eurodollar and fed-funds futures markets, for
example, where investors make bets on future short-term interest rates.
Those declines suggest investors expect higher short-term rates by late 2014
. In the fed-funds futures market, for example, the expected fed funds rate
in December 2014 is 0.35%. In the Eurodollar market, investors see 3-month
rates borrowing rates rising to 0.67% by December 2014.
A similar message is coming from swaps markets, where the market is pricing
in an average 0.37% fed funds rate between June 2014 and May 2015, according
to BNP Paribas. That is up from an expected rate of 0.17% in early May.
The fed funds rate — which is an interbank borrowing rate — was 0.08%
yesterday.
These movements aren’t huge and could quickly reverse, but they merit
attention.
There are three possible explanations for the movements in expected short-
term rates:
1) Money markets are out of whack for technical reasons.
2) The market is pricing in a stronger economy, which it in turn expects to
prompt Fed rate increases.
3) Investors are starting to doubt the Fed’s commitment to keep short-term
rates down.
Many market participants say it is the latter. “The market is saying, ‘The
fundamental economic outlook really hasn’t changed much, but we are
getting more worried about Fed policy,’” says Jan Hatzius, chief economist
at Goldman Sachs.
Since last December the Fed has been promising to keep short-term interest
rates near zero until the jobless rate reaches 6.5%, as long as inflation
doesn’t take off. Most forecasters don’t see the jobless rate reaching
that threshold until mid-2015.
At the same time, however, the Fed is talking about pulling back on its $85
billion-per-month bond-buying program. The chatter about pulling back the
bond program has pushed up a wide range of interest rates and appears to
have investors second-guessing the Fed’s broader commitment to keeping
rates low.
This is exactly what the Fed doesn’t want. Officials see bond buying as
added fuel they are providing to a limp economy. Once the economy is strong
enough to live without the added fuel, they still expect to keep rates low
to ensure the economy keeps moving forward.
It’s a point Chairman Ben Bernanke has sought to emphasize before. The Fed,
he said in his March press conference and again at testimony to Congress
last month, expects a “considerable” amount of time to pass between ending
the bond-buying program and raising short-term rates.
He seems likely to press that point at his press conference next week, given
that the markets are telling him they don’t believe it.
By Jon Hilsenrath
Federal Reserve officials have been trying to convince investors for weeks
not to overreact when the central bank starts pulling back on its $85
billion-per-month bond-buying program. An adjustment in the program won’t
mean that it will end all at once, officials say, and even more importantly
it won’t mean that the Fed is anywhere near raising short-term interest
rates.
Bloomberg News
Fed Chairman Ben BernankeInvestors aren’t listening.
A wide range of indicators suggest that investors are starting to think the
Fed might start raising short-term interest rates — now near zero — sooner
than previously thought. Until recently many market indicators suggested
investors expected the first rate increases in mid-2015, but now these
indicators indicate investors think it could be sooner.
Prices have been dropping in Eurodollar and fed-funds futures markets, for
example, where investors make bets on future short-term interest rates.
Those declines suggest investors expect higher short-term rates by late 2014
. In the fed-funds futures market, for example, the expected fed funds rate
in December 2014 is 0.35%. In the Eurodollar market, investors see 3-month
rates borrowing rates rising to 0.67% by December 2014.
A similar message is coming from swaps markets, where the market is pricing
in an average 0.37% fed funds rate between June 2014 and May 2015, according
to BNP Paribas. That is up from an expected rate of 0.17% in early May.
The fed funds rate — which is an interbank borrowing rate — was 0.08%
yesterday.
These movements aren’t huge and could quickly reverse, but they merit
attention.
There are three possible explanations for the movements in expected short-
term rates:
1) Money markets are out of whack for technical reasons.
2) The market is pricing in a stronger economy, which it in turn expects to
prompt Fed rate increases.
3) Investors are starting to doubt the Fed’s commitment to keep short-term
rates down.
Many market participants say it is the latter. “The market is saying, ‘The
fundamental economic outlook really hasn’t changed much, but we are
getting more worried about Fed policy,’” says Jan Hatzius, chief economist
at Goldman Sachs.
Since last December the Fed has been promising to keep short-term interest
rates near zero until the jobless rate reaches 6.5%, as long as inflation
doesn’t take off. Most forecasters don’t see the jobless rate reaching
that threshold until mid-2015.
At the same time, however, the Fed is talking about pulling back on its $85
billion-per-month bond-buying program. The chatter about pulling back the
bond program has pushed up a wide range of interest rates and appears to
have investors second-guessing the Fed’s broader commitment to keeping
rates low.
This is exactly what the Fed doesn’t want. Officials see bond buying as
added fuel they are providing to a limp economy. Once the economy is strong
enough to live without the added fuel, they still expect to keep rates low
to ensure the economy keeps moving forward.
It’s a point Chairman Ben Bernanke has sought to emphasize before. The Fed,
he said in his March press conference and again at testimony to Congress
last month, expects a “considerable” amount of time to pass between ending
the bond-buying program and raising short-term rates.
He seems likely to press that point at his press conference next week, given
that the markets are telling him they don’t believe it.
