Investors doubt additional Fed rate hikes will follow soon
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