The Federal Reserve: Teasing the Rate Hike, Wears a Short Skirt But Won't Put Out
Pic credit: David Dees
What will be the future of Fed interest rates and when can they start chugging upward from ZIRP?
It's the ultimate question and with the FOMC on vacay for the month of May, it will continue to be the cockteasing tale of gaming our favorite central bank in a "will they or won't they?" battle of will. Traders v central bankers - GO!
NEW YORK (Reuters) - Short-term interest rate traders are bracing for the possibility the Federal Reserve could begin raising interest rates later this year, even though many economists don't see the Fed moving any time soon.
The traders' view of a possible rate hike has been embedded in short-term U.S. interest rate futures since mid-March on increased optimism of an economic turnaround and the start of a spring rally on Wall Street, although this week's weaker-than-expected data has tempered the view.
Adding to the expectations of tighter Fed policy is the weight of the some $2 trillion in new U.S. government debt supply aimed to finance the Obama administration's stimulus and bailout programs.
"The market has priced in a rate hike by the end of the year," said Rudy Narvas, senior strategist with 4Cast Ltd. in New York.
Traders who are betting on a Fed hike later this year believe nascent signs of economic stability, rising commodity prices and $2 trillion of new U.S. government debt this fiscal year will force the Fed to tighten monetary policy earlier than the consensus view.
Don't price a rate hike in just yet, there kids, we've got a little room to fall before the Fed can comfortably start tightening the monetary policy noose. In the meantime, here we sit at ZIRP twiddling our thumbs. I thank Reuters for pointing out the obvious with "Traders who are betting on a Fed hike later this year believe nascent signs of economic stability, rising commodity prices and $2 trillion of new U.S. government debt this fiscal year will force the Fed to tighten monetary policy earlier than the consensus view." No shit? I thought traders who are betting on a rate hike did it just for fun?
The Fed has not taken a stance on the possibility of a negative interest rate, which as resident Fedwatcher around these parts leads me to believe that they're looking at all those "creative ways" to use their arsenal of tools. You know, the one that's totally empty. Therefore, doing the math, this compels me to postulate that the Fed will ride ZIRP through the end of the year. It doesn't really have a choice; thankfully, the Fed probably understands this much but I don't want to go and give them too much credit...
WASHINGTON (MarketWatch) - The Federal Reserve is not expected to tighten monetary policy until the end of the year at the earliest, Fed watchers said this week.
Policymakers are seen in no rush to remove the economy from the elaborate life-support system central bankers have erected over the past year.
The Fed has bought massive amounts of private-sector assets to keep credit flowing through the economy. So whenever the Fed does stop and reverse this policy, there will be a major "jolt" to financial markets, experts said.
Gary Stern, the retiring president of the Minneapolis Federal Reserve Bank, said on Friday that the Fed did not have to hike rates "soon."
"We have some time to observe the performance of the economy and hope that the recovery will not only materialize but that it has a firm foundation," Stern said in an interview on Bloomberg television.
With signs that the economy has at least stopped its free-fall, Wall Street has started to debate the Fed's "exit strategy." It hasn't taken long for a bitter row between two camps to break out.
One side believes the money that the Fed has been pumping into the economy is bound to create inflation down the road and it is better to start worrying about it, and doing something about it, now.
Others take the opposite view and think there is so much slack in the economy that the threat of falling prices is being dismissed too easily. They are deeply concerned that it may be a long time before the recession ends.
The dispute almost has "theological" overtones, said James Glassman, economist at JP Morgan Chase.
I appreciate Mr Glassman's reference to God here - our friends at the mysterious and all-powerful Fed are like Zeus flexing his muscle from the Heavens, aren't they? Here's a little lightning and some thunder and OMG what'sthisit'safreakinghousingbubble!!! Cute to say the least.
The Fed has no wiggle room, this much we know.
Pull out, Fed, pull out! You're going to knock up the economy with all the funny money sprayed everywhere!