Tags: LaVorgna | markets | Fed | rates

Deutsche Bank's LaVorgna: Markets May Not Believe Fed on Policy Plans

By    |   Tuesday, 28 October 2014 03:23 PM

While Federal Reserve policymakers on average forecast the federal funds rate will rise to 1.375 percent by the end of 2015, many financial market participants believe the process will be much slower.

Indeed, money-market traders are betting that the Fed won't even start lifting the federal funds rate until October. The Fed has kept the rate at a record low of zero to 0.25 percent for six years.

Joe LaVorgna, chief U.S. economist at Deutsche Bank, sees three reasons why the markets' forecast differs from the Fed's own.

"One, financial market participants do not believe the Fed's real GDP, unemployment and inflation forecasts," he writes in a commentary obtained by CNBC. "Instead, investors believe that growth and inflation will remain modest, which means the Fed will be very slow in raising interest rates."

In addition, "the markets believe that Chair Janet Yellen is extremely dovish," LaVorgna noted.

"The third reason may simply be that the financial markets do not believe what the Fed says it is going to do in the future.

"Ultimately, the path of interest rates will depend on the economy's spare capacity. If inflation and wage pressures develop over the next several quarters, then the Fed's interest rate forecasts are likely to be realized," he explained.

"If, however, inflation remains well below 2 percent as the economy expands and the unemployment rate falls, then financial markets will be proven correct."

To be sure, not everyone thinks the central bank will delay its rate hikes.

"The Fed is certainly going to consider the turmoil we have seen in recent weeks," Dana Saporta, director of U.S. economic research at Credit Suisse, told Bloomberg. "But ultimately we think they will stay the course and the first tightening will come in the middle of next year."

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While Federal Reserve policymakers on average forecast the federal funds rate will rise to 1.375 percent by the end of 2015, many financial market participants believe the process will be much slower.
LaVorgna, markets, Fed, rates
297
2014-23-28
Tuesday, 28 October 2014 03:23 PM
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