Tags: fed | rate | hike | talk

Ahead: Fed Could Quash Speculation on Rate Hike

By Dan Weil   |   Thursday, 18 Jun 2009 02:50 PM

Talk has emerged this month that the Federal Reserve may raise interest rates before year end. Not so fast, says the Fed itself.

On June 5, federal funds futures contracts indicated a 70 percent chance that the central bank will increase the fed funds rate to at least 0.5 percent by November.

That occurred after the government announced a smaller-than-expected job loss for May

Yet the Fed itself is considering squelching the rate rise talk next week.

In the statement at the Federal Open Market Committee meeting June 24, the Fed may emphasize signs of weakness in the economy to make clear a rate increase isn’t coming anytime soon.

“There are ways of highlighting their low rate expectations without over-committing,” Lou Crandall, chief economist at Wrightson ICAP, tells Bloomberg.

On one hand, the Fed wants to make sure interest rates stay low enough to encourage economic recovery.

On the other hand, it doesn’t want to lose its freedom to raise rates when necessary.

In its past two statements, the FOMC has said “economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period.”

But bond yields have surged anyway, amid concern that the government’s massive fiscal and monetary stimulus will spark inflation.

Not everyone is talking about an imminent rate hike.

Paul McCulley, head of Pimco’s short-term bond desk, says on the company’s web site that the Fed won’t raise rates before 2011.

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