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Money Markets Move Up Target for Fed Rate Increase to June 2015

Wednesday, 19 March 2014 03:47 PM

Money-market derivatives brought forward the timing by one month for when the Federal Reserve will first raise interest rates after central bank officials increased their projections for the main policy rate.

Forward markets for overnight index swaps, derivative contracts that speculate on the path of the federal funds rate, show traders predict the central bank will first raise rates in about June 2015, according to data compiled by Bloomberg. Before the ending of the Fed policy meeting the increase in rates was forecast a month later.

Implied yields on federal funds futures traded at the CME Group Inc. exchange signal a 56 percent probability the Fed will first increase its target rate in June 2015, according to calculations available on the exchange’s website. That’s up from 42 percent in the morning.

“The market came into this meeting thinking that if anything the FOMC members might revise down the dots,” which represent their projects for the fed funds rate, said Andrew Hollenhorst, fixed-income strategist at Citigroup Inc. in New York, during a telephone interview. “The fact that the Fed not only didn’t lower the dots, but raised them was a surprise on the hawkish side for the market.”

Fed Projections

The median estimate by Fed officials was for the fed funds rate to move to 1 percent in December 2015 and 2.25 percent a year later, that compares to estimates in December of 0.75 percent and 1.75 percent respectively, according to their summary of economic projections. An updated SEP, as the report is known, had a median estimate for the long-run policy rate of 4 percent, unchanged from the December report.

Fed Chair Janet Yellen said that the Open Market Committee’s statement on the outlook for the key policy rate is more important than the projections on the Summary of Economic Projections.

I “warn you that the dots are going to move up and down over time,” Yellen said in response to a question. “I really don’t think it’s appropriate to read very much into it.”

The central bank has kept its benchmark rate for overnight loans between banks in a range of zero to 0.25 percent since December 2008.

The Federal Open Market Committee opted for a third $10 billion cut in monthly bond buying to $55 billion, according to the median of economist estimates in a survey. The Fed also discarded its 6.5 percent jobless rate threshold while adopting qualitative guidance for signaling when it will consider raising the benchmark interest rate.

Implied yields on federal fund futures rose following the completion of the Fed policy meeting. The implied yield on the December 2015 contract rose to 0.80 percent, from 0.64 percent, and that on the December 2016 contract rose to 1.89 percent from 1.61 percent.

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Money-market derivatives brought forward the timing by one month for when the Federal Reserve will first raise interest rates after central bank officials increased their projections for the main policy rate.
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2014-47-19
Wednesday, 19 March 2014 03:47 PM
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