Tags: Dealers Say Economic Pessimism Fueling Bets Against the Fed

Dealers Say Economic Pessimism Fueling Bets Against the Fed

Thursday, 08 Jan 2015 04:16 PM

Markets are trading below Federal Reserve policy makers’ own projections for short-term interest rates primarily because investors’ outlook for the U.S. economy is more pessimistic, according to the banks and brokerage firms that trade directly with the central bank.

“Differences in the outlook for the U.S. economy” was cited as the main explanation for the gap, said the 22 primary dealers surveyed by the New York Fed ahead of the Federal Open Market Committee’s Dec. 16-17 meeting in Washington.

The survey was distributed on Dec. 4 and responses were collected by Dec. 8.

Other reasons cited for pushing short-term interest rate futures below FOMC projections, in order of importance, were policy makers’ own uncertainty surrounding their forecasts, and the possibility that the Fed doesn’t raise interest rates at all.

Eurodollar futures contracts currently imply a 1.5 percent federal funds rate at the end of 2016, well below the median 2.5 percent forecast of Fed officials published at the conclusion of the December meeting.

The New York Fed conducted a separate survey posing the same question to 29 market participants, made up mostly of large investment firms like BlackRock Inc., Brevan Howard and Tudor Investment Corporation.

While their answers were in line with the dealers’ responses, they saw policy makers’ own uncertainty as the most important reason investors were taking a cautious approach. Next in order of importance were a less optimistic economic outlook and the possibility that the Fed doesn’t raise interest rates at all.

The median respondent in both groups said the Fed will probably increase the benchmark fed funds rate for the first time in more than eight years at its June meeting, and the top end of the Fed’s target range for the rate would rise to 1 percent by the end of the year, matching policy makers’ own projections.

To contact the reporter on this story: Matthew Boesler in New York at mboesler1@bloomberg.net To contact the editors responsible for this story: Chris Wellisz at cwellisz@bloomberg.net Mark Rohner, Carlos Torres

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Dealers Say Economic Pessimism Fueling Bets Against the Fed
Dealers Say Economic Pessimism Fueling Bets Against the Fed
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2015-16-08
Thursday, 08 Jan 2015 04:16 PM
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