Economists still see Fed rate rise before year end http://on.ft.com/1Xd3uMd
A splintering of opinion at the top of the Federal Reserve has left Wall Street deeply divided, with nearly two-thirds of economists expecting the US central bank to lift rates before year end while investors and traders broadly write off the prospect, according to a Financial Times survey.
Despite a tempering in the US labour market and lacklustre economic figures reported through the first weeks of October, 65 per cent of the 46 economists polled by the FT said the central bank would increase the federal funds rate at its December meeting.
The view is in stark contrast to market expectations, which have downplayed the chance of tighter monetary policy before next year, and to recent comments from top officials at the US central bank who have cautioned against prematurely tightening monetary policy.
More than half of the economists surveyed said the Fed risked a policy mistake this year, although they split on whether the error was lifting rates too soon or too late. Several argued that weakening economic data — including disappointing retail sales, industrial production and regional manufacturing reports — and muted inflation underscored the need for the Fed to wait.
“The Fed always risks a policy error no matter what it does or doesn’t do,” Scott Brown, an economist with Raymond James, said. “However, the risks here aren’t symmetric. That is, if it hikes prematurely, if would be harder to correct course.”
None of the economists surveyed by the FT said they expected the Fed to lift rates following its next meeting on October 28, a conference not currently accompanied by a press briefing. More than 85 per cent said that the central bank will have lifted rates twice by the time it concludes its June meeting next year.
Division at the central bank has unnerved markets, and more than a dozen economists said communication was either “moderately” or “very unclear”.
Trigger-shy Fed policymakers confounded markets and flamed volatility in September, after opting to keep rates near the lowest level since the financial crisis. Many investors said the decision to wait underlined fears the global economy was slowing.
Ahead of the September decision, more than nine-in-10 economists surveyed by the FT expected the central bank would have shifted policy off its current near zero interest rate by the end of the year.
Top Fed officials have since conceded that the strength of the dollar and gyrations in financial markets have acted as the equivalent of a rate rise, warning that a further tightening by the central bank could hinder the US recovery
Sliding commodity prices, pressured by lacklustre conditions in China and across the emerging world, have also undermined confidence that inflation will return to the Fed’s stated target of 2 per cent.
Interest rate futures have broadly priced out the possibility of a rate rise before 2016, with odds first tipping above 50 per cent for the central bank’s March meeting, according to federal funds futures analysed by CME Group.
Thomas Costerg, an economist with Standard Chartered, warned that the window for the Fed to lift rates was drawing to a close as growth trends decelerated and an election approaches in 2016.
“December is the last window of opportunity to raise rates,” he said. “The Fed has to go now.”