Fed Rate Hike Clock May Start Ticking Today

17 Dec 2014 | Author: | No comments yet »

Fed Rate Hike Clock May Start Ticking Today.

In addition to issuing its usual policy statement to close out its final meeting of the year, the Fed will update its economic forecast and Fed Chair Janet Yellen will hold a news conference. WASHINGTON – A sturdy U.S. recovery is expected to trump global economic worries as the Federal Reserve concludes its last policy meeting of 2014 on Wednesday, with officials likely to signal they are still on track to raise interest rates next year.

So, it’s little wonder they’re discounting central bankers’ talk of higher borrowing costs in 2015 as oil plunges, roiling markets worldwide and lowering the growth outlook. “The Fed believes it understands market turmoil,” Jim Vogel, a fixed-income strategist at FTN Financial, wrote yesterday in a research note. “Central banks have a lot more to learn when it comes to global financial conditions.” Fed policy makers conclude a two-day meeting in Washington today to discuss their plan to withdraw monetary stimulus and hash out what the collapse in oil means for the outlook.Treasuries fell before Federal Reserve policy makers wrap up a meeting amid speculation they’ll look beyond Russia’s currency crisis and discuss dropping a pledge to keep interest rates low for a “considerable time.” U.S. debt pared losses after a report showed the consumer price index declined in November by the most in almost six years, depressed by falling energy prices. With oil prices in freefall, Japan in recession and the euro zone sputtering, the Fed for a second consecutive meeting will weigh the U.S. economy’s apparent strength against overseas risks that now include a potential currency crisis in oil exporter Russia.

The general consensus among economists and analysts has been that “for a considerable period” has meant about six months, which means that if the language is removed today rates should start moving higher in mid-2015. ET and Wall Street is eagerly awaiting the central bank’s statement and chair Janet Yellen’s faceoff with reporters afterward for clues as to the timing of its first rate hike next year.

Inflation expectations are back down to where they were right before the Fed embarked on its second round of bond purchases, or quantitative easing, in 2010. It will be interesting to see what it’s replaced with, and how the Fed is able to balance between keeping monetary policy extraordinarily accommodative, while moving toward the first rate hike.” The benchmark 10-year yield rose two basis points, or 0.02 percentage point, to 2.08 percent as of 10:14 a.m. in New York, according to Bloomberg Trader data. The FOMC will replace “considerable time” with a word such as “patient” to describe its approach to policy, according to 68 percent of 56 economists surveyed by Bloomberg last week.

Fed officials have expected a temporary softening of inflation given the big plunge in oil prices, but have indicated signs of strength in the job market elsewhere have left them confident U.S. wages and prices will eventually start to rise. The Fed has said it won’t raise rates until it meets its dual mandate of full employment and price stability, which it describes respectively as an unemployment rate in a range of 5.2%-5.6% and inflation at a range of 1.7%-2%.

QE2 was controversial because it fueled concern that inflation would spike (that never happened), but expectations that prices would accelerate faster were exactly what central bankers wanted. Barclays takeaway: “The results suggest that investors are generally complacent about the Fed’s move to normalize rates,” the firm said in a note to clients. The unemployment rate, currently at 5.8%, its lowest level in six years, is well on its way to reaching the desired range, but inflation has been more problematic, running much lower than the Fed’s 2% target rate for months, mostly due to stagnant U.S. wages. Traders are pricing in consumer price increases over the next five years of about 1 percent — see chart — well below the Fed’s 2 percent goal for price stability. 2.

If you make any changes right now, any reaction might be amplified,” said Jennifer Lee, a senior economist at BMO Capital Markets in Toronto. “I don’t think they want to rock the boat too much.” — Pace after liftoff: Yellen, in her press conference, is likely to stress that that the Fed’s interest-rate path will depend on how economic data evolves, said Lou Crandall, chief economist at Wrightson ICAP LLC in Jersey City, New Jersey. “There is a fairly good chance that she will point out that once the rate hikes begin, that they will definitely not be on the same kind of predetermined schedule that they were on last time,” he said. But rapidly falling oil prices have recently put even more downward pressure on inflation as a barrel of oil has fallen well-below $60, driving down the price of gasoline across the U.S. For the US, lower oil costs are considered an overall plus in the long run, even though they pose an immediate drag on inflation and may trim jobs and investment in the energy industry.

When the Fed began raising rates in June 2004, it did so at a “measured” pace, which translated into a quarter-point increase at every meeting for the next two years. Attention will focus on just how strongly the Fed voices its faith in US prospects, and in particular whether it drops its longstanding view that it would wait a “considerable time” before raising rates.

For junk-rated energy companies — whose business models are being called into doubt with oil at less than $60 a barrel — yields have almost doubled to 10.4 percent on average from 5.7 percent in June, according to Bank of America Merrill Lynch index data. Complicating the Fed’s decision is that other major central banks — in Europe, Japan and China, for example — are moving in the reverse direction to keep rates down to support slowing economies.

Yellen on lower oil prices: The retreat in crude oil prices has been the biggest macro development since Fed Chairwoman Janet Yellen’s last press conference in September. The volume of Treasuries traded through ICAP Plc, the largest inter-dealer broker of U.S. government debt, yesterday climbed to $425 billion, the most since Dec. 5. Economists expect the U.S. central bank, which has held overnight rates near zero since late 2008, to begin bumping benchmark borrowing costs higher around the middle of next year.

U.S. central bankers may say they’re monitoring markets carefully as Russia’s currency collapse threatens to destabilize other regions, said David Stockton, a former Fed research director who led presentations of economic and financial data for policy makers. Raising interest rates will make it more expensive for consumers and businesses to borrow money, raising the costs on everything from a mortgage to a car loan.

At the same time, they will keep their focus on U.S. economic strength and probably replace the language on timing with something that says they’re going to be patient with rate increases, said Stockton, senior fellow at the Peterson Institute for International Economics in Washington. In a statement after its last meeting in late October, the Fed largely looked beyond problems in Europe and Japan and expressed confidence the U.S. economy would continue to grow and generate jobs. The ruble has plummeted this week, losing as much as 19 percent yesterday in the biggest one-day drop in 16 years, as panic swept across Russian financial markets after a surprise interest-rate increase overnight failed to stem a run on the currency.

Vincent Reinhart, who was the Fed’s top staff economist then, said it would be a wrong to assume that the lag time between a change in the statement’s language and a rate increase would necessarily be the same this time. Brian Bethune, an economics professor at Tufts University, noted that while job gains have been solid, wage growth remains weak and inflation is slowing, reflecting the plunge in gas prices and a stronger dollar. FILE – In this Oct. 16, 2014 file photo, Federal Reserve Chairman Janet Yellen listens to clients relate their experience during a visit to the office of CONNECT, a coalition of local organizations that provides employment services in Chelsea, Mass.

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