Many economists expect the Federal Reserve to begin raising interest rates around mid-year. But developments in several important financial markets indicate the Fed might wait longer,
The Wall Street Journal reports.
"The market is telling you that a rate increase from the Fed will come later rather than sooner," Mark MacQueen, a portfolio manager at Sage Advisory Services, tells the paper.
In the federal funds futures market, most traders believe that a rate hike won't come until September.
Meanwhile, the value of short positions in the Eurodollar futures market plunged 86 percent to $14.5 billion in the week ended Jan. 6, Cheng Chen, U.S. rates strategist at TD Securities, tells The Journal.
That's significant because investors short Eurodollar futures to hedge against rising interest rates. So the drop in short positions indicate investors don't expect a rate hike soon.
In addition, the five-year forward five-year break-even rate, which measures the yearly inflation level expected by investors between 2020 and 2025, plummeted to 1.86 percent last week, its lowest level since December 2000, according to The Journal.
Lower inflation means a longer wait for a Fed rate increase. The central bank's inflation target is 2 percent.
Any delay by the Fed will certainly raise the ire of Stephen Roach, a senior fellow at Yale University and former Chairman of Morgan Stanley Asia and the firm's chief economist. He says the central bank already is moving too slowly to raise rates and reverse the other elements of its easing program.
"America's Federal Reserve is headed down a familiar — and highly dangerous — path," he writes in an article for
Project Syndicate.
"Steeped in denial of its past mistakes, the Fed is pursuing the same incremental approach that helped set the stage for the financial crisis of 2008-2009. The consequences could be similarly catastrophic."
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