US Fed likely to raise interest rates: Survey

June 17, 2014

Washington (June 17)  The Federal Reserve will probably raise its benchmark interest rate faster than money-market investors expect, according to most economists surveyed by  Bloomberg News  .

 Eurodollar futures, the world's most actively traded short-term interest-rate contract, are underestimating the pace of tightening over the next two years, according to 55 per cent of 56 economists in the  June 12-16  survey. Fed officials began a two-day meeting yesterday in  Washington  .

 Investors in the contracts are assuming a slower pace of rate increases than the Fed itself, said  Conrad DeQuadros  , senior economist at RDQ Economics in  New York  . They may also be overlooking recent reports showing the world's largest economy is gaining strength after contracting in the first quarter, he said.

 "I find it kind of odd that the market is not even priced for the median forecast the Fed has delivered," DeQuadros said. "There is going to be an adjustment upward."

 Options on Eurodollar futures contracts show a 47 per cent probability the Fed's benchmark rate will be 0.75 per cent or lower at the end of 2015. The odds that the rate will be two per cent or lower by the end of 2016 are 54 per cent. Eurodollars trade in price terms while the implied yield is derived by subtracting the contract price from 100.

 New forecasts 

 Officials led by Chair  Janet Yellen  will release a new set of quarterly forecasts for unemployment, inflation, economic growth and the benchmark federal funds rate at the conclusion of their meeting today.

 Investors may be focusing on the one per cent first-quarter economic contraction caused in part by unusually severe winter weather, said  Carl Riccadonna  , senior US economist at  Deutsche Bank Securities  in  New York  .

 Instead, they should be paying attention to recent signs of a rebound, he said.

 Output at factories, mines and utilities rose 0.6 per cent in May, reflecting gains at makers of automobiles, business equipment and construction supplies, according to Fed data released on Monday. Builder sentiment this month jumped by the most in almost a year, another report showed.

 Fed officials have also underestimated the strength of the economy.

Source: Bloomberg

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