Rate hike is ‘widely expected’ this year, top Fed official says

25 Mar 2015 | Author: | No comments yet »

Fed’s Fischer: Rate Hike ‘Likely’ By End of Year.

(Bloomberg) — Treasuries advanced after Federal Reserve Vice Chairman Stanley Fischer that while higher interest rates are warranted this year, economic developments will guide the pace and extent of increases.An influential Federal Reserve official on Monday said the central bank is “likely” to lift interest rates by the end of the year, sending an even louder and clearer message to markets that a rate hike is imminent. “An increase in the target federal funds range likely will be warranted before the end of the year,” Fed Vice Chair Stanley Fischer said in prepared remarks at the Economic Club of New York. The 10-year note yield was close to six-week lows as Fischer said interest rates “will sometimes have to be increased, and sometimes decreased” during normalization from the zero level.

Fischer is a close ally of Fed Chair Janet Yellen and both are viewed as inflation doves who favor an accommodative policy for helping the U.S. economy get back on track after the fallout from the 2008 financial crisis. Investors are questioning the sustainability of U.S. economic strength after the Fed lowered its growth and interest-rate assessments last week. “His speech makes it clear any thought you may have had of a series of consecutive rate hikes is being proven false,” said Dan Greenhaus, chief global strategist in New York at BTIG LLC. “They may also reduce rates along the way.” The 10-year yield fell two basis points, or 0.02 percentage point, to 1.91 percent at 1:01 p.m. in New York, according to Bloomberg Bond Trader data. The doves have held sway on the Fed’s policy-setting Federal Open Markets Committee, initiating three rounds of bond purchases known as quantitative easing and keeping interest rates at near-zero since December 2008. “The approach of liftoff reflects the significant progress we have made toward our objectives of maximum employment and price stability,” Fischer said, referring a strengthening labor market and projections that inflation is expected to start rising toward the Fed’s 2% target rate later this year. Although Yellen cautioned that removing the word patient “didn’t mean the Fed would be impatient.” Fischer seemed to be expanding on that sentiment on Monday. The U.S. is scheduled to sell $35 billion of five-year notes and $13 billion in two-year floating-rate notes on March 25 along with $29 billion of seven-year notes the following day.

But a smooth path upward in the federal funds rate will almost certainly not be realized, because, inevitably, the economy will encounter shocks — shocks like the unexpected decline in the price of oil, or geopolitical developments that may have major budgetary and confidence implications, or a burst of greater productivity growth, as the Fed dealt with in the mid-1990s,” he explained.

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