In­vestors doubt ad­di­tional Fed rate hikes will fol­low soon

The Star Early Edition - - BUSINESS REPORT / INTERNATIONAL - Steve Matthews and Matthew Boesler

WHILE Janet Yellen and her Fed­eral Re­serve col­leagues are poised to raise in­ter­est rates at their meet­ing this month, in­vestors in­creas­ingly doubt the cen­tral bank’s pro­jec­tion for ad­di­tional hikes fol­low­ing soft re­ports on US em­ploy­ment and in­fla­tion.

Gold­man Sachs on Fri­day pushed back its forecast for a third rate in­crease this year to De­cem­ber from Septem­ber. Trad­ing in fu­tures con­tracts shows odds of a Septem­ber in­crease have dropped to just one in four, and in­vestors are now pric­ing in less than one rate hike in 2018 for the first time since the eve of the US elec­tions in Novem­ber.

Fed of­fi­cials speak­ing on Fri­day ex­pressed no dis­ap­point­ment with the pay­rolls gain of 138 000 last month, which was be­low econ­o­mists’ ex­pec­ta­tions. Philadel­phia Fed Pres­i­dent Pa­trick Harker called it a “good num­ber,” while Dal­las Fed Pres­i­dent Robert Ka­plan said “if we are not at full em­ploy­ment, we are mov­ing closer.”

“I’d be very sur­prised if they didn’t hike in June, given all the sig­nals that they have sent,” said Jonathan Wright, an eco­nom­ics pro­fes­sor at Johns Hop­kins Univer­sity in Bal­ti­more. While he still ex­pects two more

The FOMC last raised rates in March and at the time pro­jected two ad­di­tional in­creases this year.

in­ter­est-rate in­creases this year, the prob­a­bil­ity has in­creased that the Fed­eral Open Mar­ket Com­mit­tee (FOMC) will move only in June, he said.

The labour de­part­ment re­port showed the job­less rate fell to a 16-year low of 4.3 per­cent, which is be­low the level the FOMC es­ti­mates to be full em­ploy­ment. Monthly pay­roll gains are av­er­ag­ing 162 000 this year, a step down from the 2016 pace of 187 000. Av­er­age hourly earn­ings rose 2.5 per­cent from a year ear­lier, in­di­cat­ing a tight­en­ing labour mar­ket hasn’t brought an ac­cel­er­a­tion in wages.

The FOMC last raised rates in March and at the time pro­jected two ad­di­tional in­creases this year and three in 2018.

“The Fed has lit­tle cred­i­bil­ity,” said Ward McCarthy, chief fi­nan­cial economist with Jef­feries in New York. In­vestors ex­pect “the Fed to again back away from rais­ing rates at min­i­mal provo­ca­tion. That is the legacy of the FOMC rate hikes un­der­achiev­ing rel­a­tive to FOMC pro­jec­tions for so many years.”

If Yellen de­cides to push for­ward in Septem­ber, the FOMC may be forced to en­gage in a “public cam­paign” of fairly ex­plicit sig­nals for a rate hike sim­i­lar to what oc­curred in March, he said.

The Fed’s Beige Book on Wed­nes­day cited a va­ri­ety of anec­dotes of worker short­ages and iso­lated pay raises across the cen­tral bank’s 12 dis­tricts. There was a man­u­fac­turer in the Chicago re­gion rais­ing pay 10 per­cent to at­tract work­ers.

Yet over­all, there’s no sign the tight­en­ing labour mar­ket is lifting in­fla­tion, which has been un­der the Fed’s 2 per­cent tar­get for ev­ery month but one for the last five years. – Bloomberg

Photo: AP

Job seek­ers work on their re­sumes dur­ing the Op­por­tu­nity Fair and Fo­rum em­ploy­ment event in Dal­las, Texas. The US is mov­ing closer to full em­ploy­ment.

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