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Well Fed

28 October 2015 By Richard Beales

Federal Reserve Chair Janet Yellen’s view on interest rates may finally have registered with traders and investors. In Wednesday’s statement, the Federal Open Market Committee kept rates near zero but explicitly set its next meeting in December as a decision point for the long-awaited liftoff. Futures prices suggest markets are almost – on board after a period of discord.

The U.S. economy is humming, if not singing, along and the job situation in particular is approaching as good as it can get by some measures. Before the summer, investors seemed resigned to seeing the first non-zero interest rate in nearly seven years by the end of 2015. But a bout of global stock-market volatility turned that sentiment around.

Since then, Yellen and others have been fighting the market belief, shared by some members of the rate-setting committee, that rates wouldn’t go up this year. If nothing else, lifting off would start a process toward a more normalized, steady-state level of rates.

Yet although Fed officials say they don’t pay much heed to short-term market volatility, it’s hard not to think that part of the reason the central bank declined to raise borrowing costs in September was that investors didn’t think it would, and to do so would therefore have rocked the financial-market boat.

That dilemma may explain some of the misunderstanding of late, although the Fed – especially Yellen and her most senior colleagues – have actually been fairly consistent in their statements. A hike this week, though, looked unlikely. It’s symbolic, if nothing else, that the Dec. 15-16 FOMC meeting will come with a scheduled press conference at which Yellen can explain things, whereas this week’s did not.

Marking December firmly in the calendar, as it were, moved fed funds futures to a level where the implied probability of a rate hike by year’s end is now nudging close to 50 percent – up from a third prior to the statement. That means the puppeteer and the puppets are nearly in agreement, even if the recent back-and-forth makes it hard to be certain which is which.


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