Buffeted by a weakening of US economic data recently, market expectations that the Federal Reserve will begin its tightening cycle in 2015 have been slipping in recent days.
That’s undermined the US dollar which fell to its lowest level, in US dollar index terms, since late August. It’s also driven 10-year treasury yields back under 2% while 2-year treasuries at 0.56% are only a point-and-a-half above their 4-month low.
It’s looking like those trader bets might be the right ones, according to noted Fed watcher Jon Hilsenrath. In an article published on the Wall Street Journal website in early Asian trade, Hilsenrath says: “The chances of a Federal Reserve interest-rate increase in 2015 are diminishing amid new signs of anemic economic activity.”
Hilsenrath says after jobs, consumer spending and inflation data this month, the chances of a rate hike this month have been “virtually eliminated”. That accords with market price approximating around a 5% chance of a hike.
As a consequence, the focus has turned to the final FOMC meeting of the year with market pricing around a 30% chance of a rate hike. But Hilsenrath suggests even that might be too much, given that vice-chair Stanley Fischer’s much-heralded recovery in growth after the first quarter’s weakness does not appear to be materialising.
“Fed officials have given up on expectations that growth would accelerate in 2015, as they hoped would happen at the beginning of the year,” Hilsenrath wrote. “Their hope now is that a healthy domestic economy can withstand slowing overseas economies and turbulent financial markets and keep growing at a fast enough pace to modestly reduce unemployment further.”
Indeed it was worries about “conditions abroad” which were widely focussed on by traders, the Fed, and pundits when the Fed decided not to raise rates during September.
Already this week we have seen a more balanced, slightly dovish, narrative from Fed speakers during numerous speeches and Hilsenrath implies there are strong divisions between the Washington-based governors of the FOMC and the regional Fed presidents.
Highlighting recent speeches by Lael Brainard and Daniel Tarullo, Hilsenrath said:
“The comments by the Washington-based governors also reflect internal divisions; they were striking back at regional Fed bank presidents, who tend to speak out more frequently and have been among the most outspoken advocates for rate increases this year.”
It’s not exactly open warfare between the views but Fed chair Yellen clearly has a job to do managing competing views on the board.
Unless non-farm payrolls come back with gusto in the next two months, managing that balance looks increasingly like Yellen and her colleagues will continue to have to wait and see.
That means the chances of a rate hike in 2015 are slipping away.
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