{"id":579,"date":"2014-10-28T16:24:08","date_gmt":"2014-10-28T20:24:08","guid":{"rendered":"http:\/\/www.c2ig.com\/?p=579"},"modified":"2014-10-28T16:24:48","modified_gmt":"2014-10-28T20:24:48","slug":"investors-push-rate-hike-forecast-out-to-late-2015","status":"publish","type":"post","link":"http:\/\/www.c2ig.com\/2014\/10\/investors-push-rate-hike-forecast-out-to-late-2015\/","title":{"rendered":"Investors push rate-hike forecast out to late 2015"},"content":{"rendered":"

Oct 28, 2014<\/p>\n

By Bloomberg News<\/strong><\/p>\n

Investors eyeing recent global economic and political turmoil are expressing doubt about forecasts from Federal Reserve officials \u2014 and most Wall Street economists \u2014 that the Fed will begin to lift its benchmark interest rates in mid-2015.<\/p>\n

The Federal Open Market Committee meets Tuesday and Wednesday after six weeks of volatility in global financial markets. Chair Janet Yellen and her colleagues will focus instead on a robust U.S. outlook and end their bond-buying program as planned, according to 62 of 64 economists surveyed by Bloomberg News. By smaller margins, most also expect the FOMC to reiterate rates will stay low for a \u201cconsiderable time\u201d and that there’s a \u201csignificant underutilization of labor resources.\u201d<\/p>\n

Since the FOMC met in mid-September, oil prices have tumbled 14%, the S&P 500 Index dropped as much as 7.4% from a record close and yields on 10-year Treasury notes touched the lowest since May 2013. The retrenchment has widened a gulf between Fed officials and a majority of private economists on one side, who see the next tightening by mid-2015, and investors who say rates will stay at record lows for longer.<\/p>\n

\u201cThe Fed is certainly going to consider the turmoil we have seen in recent weeks,\u201d said Dana Saporta, director of U.S. economic research at Credit Suisse Group AG in New York, whose firm expects the quantitative easing program to end at this meeting. \u201cBut ultimately we think they will stay the course and the first tightening will come in the middle of next year.\u201d<\/p>\n

DUDLEY AGREES<\/b><\/p>\n

Fed district bank presidents William C. Dudley of New York and John Williams of San Francisco earlier this month called such estimates reasonable. Economists in the Oct. 22-24 Bloomberg survey agreed, with 52% predicting the FOMC will raise the benchmark interest rate in the second quarter of 2015.<\/p>\n

Fed officials’ September forecasts showed a median funds rate estimate of 1.375% at the end of next year. One scenario to reach that outcome would be rate rises starting midyear in quarter-point steps over the following several meetings.<\/p>\n

Contradicting that view are U.S. money markets, where investors are betting on a later tightening. Futures contracts show an 85% probability that the Fed’s policy rate will be no higher than 0.25% in June 2015. Sixty-four percent see it at 0.5% or higher in December of that year.<\/p>\n

Concern over the spread of the Ebola virus, low inflation in developed economies, resurgent violence in the Middle East and stagnating euro-area growth have all caused investors to put more weight on the possibility of a later rate rise next year, said Lou Crandall, chief economist at Wrightson ICAP.<\/p>\n

\u201cMarkets have seen a lot of things they don’t fully understand over the past three or four weeks,\u201d said Mr. Crandall, who is forecasting a June rate increase.<\/p>\n

A large minority of economists in the survey share that view. Forty-one percent said the first rate increase would happen in the third quarter or later. Eight percent said it would occur in the first quarter of 2015.<\/p>\n

Despite global challenges, most economists forecast the U.S. economy will expand 3% next year, bringing unemployment down to an average rate of 5.5% in the fourth quarter of 2015, according to a separate Bloomberg News survey Oct. 3-8. That’s at the top end of Fed officials’ estimated range for full employment. The jobless rate was 5.9% in September.<\/p>\n

MORE ‘UNCERTAINTY’<\/b><\/p>\n

\u201cThe baseline outlook looks the same, but the uncertainty around the baseline has increased\u201d and short-term rate markets are pricing accordingly, said Michael Gapen, senior U.S. economist at Barclays Capital Inc. and a former member of the Fed board staff. Barclays forecasts a June rate increase \u201cwith risks\u201d that it happens in September, Mr. Gapen said.<\/p>\n

Yield differences between Treasury notes and U.S. government inflation-linked bonds show investors now expect inflation to average 1.5% over the next five years compared with 1.81% on Sept. 16.<\/p>\n

St. Louis Fed President James Bullard said in an interview Oct. 16 that it would be a \u201clogical policy response\u201d to delay the end of quantitative easing to boost inflation expectations. Economists in the survey gave an extension of quantitative easing only a 3% probability.<\/p>\n

Lower commodity prices due to a weaker global growth outlook are the primary reason expectations for U.S. inflation have moved lower in market measures, according to 71% of economists polled.<\/p>\n

Actual inflation, measured by the personal consumption expenditures price index, has remained below the Fed’s 2% target for 28 months, with prices rising just 1.5% for the 12 months through August.<\/p>\n

Seventy-two percent of economists in the survey said the price index won’t show a third consecutive reading of 2% or higher until the fourth quarter of 2015 or later.<\/p>\n

Even so, 53% said the Fed will leave its phrasing on inflation unchanged from September. At that time, the FOMC said the \u201clikelihood of inflation running persistently below 2% has diminished somewhat since early this year.\u201d<\/p>\n

Thirty-six percent of economists said the Fed will revert to language used mid-year, that inflation \u201cpersistently below\u201d the 2% target \u201ccould pose risks to economic performance.\u201d<\/p>\n

Eighty percent of economists said the Fed will continue say it will be appropriate to hold the federal funds rate between zero and 0.25% for a \u201cconsiderable time.\u201d<\/p>\n

Among them is Ryan Sweet, a senior economist at Moody’s Analytics. The drop in oil prices will help offset a weaker world economy, he said.<\/p>\n

\u201cThere are a lot of crosscurrents, but what really matters for the course of QE is what it means for growth,\u201d Mr.Sweet said. \u201cAll the events over the past few weeks are neutral to a slight positive for GDP.\u201d<\/p>\n

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