Just days before a key Federal Reserve meeting market expectations that the US will tighten monetary policy are strongly divided because of mixed signals from the central bank, says the Financial times. Divergent comments from Fed officials lead to a situation in which futures traders bet against raising interest rates while the majority of economists forecast an increase.
Interest rate dilemma
To exit this state of uncertainty is a major test for Fed Chairman Janet Yellen, who must find a balance between conflicting economic data and as multidirectional lobbying pressure from various factors throughout the world. If rates are not raised at the September meeting, it will extend destabilizing period of uncertainty in the future actions of the Fed. Such a decision would be difficult communicated by Yellen that personally advocate for raising interest rates this year. In case of delay the Fed chairman will hardly convince traders that keeps his word.
However, if the Fed ignore investors’ sentiment and raise interest rates, this will lead to a risk of an abrupt market reaction in the period in which they already suffer from increased volatility. Some observers fear that premature lifting of interest rates will hurt the economic recovery in the US. “We are at a delicate moment. Until recently, I thought that there would be no problem for the economy if the Fed raise interest rates, but now I begin to worry,” said Annie Richards of Aberdeen Asset Management.
Currently only 28% of the bets on the futures market are immediately raising interest rates, and 41% are for the preservation of current levels by the end of 2015. However, yields on US government bonds with two-year maturity reached a four-year high of 0.76 percent, which could be regarded as a signal that some investors still see growth rates on the horizon. The situation contrasts with earlier periods of increased interest rates the Fed in 2004 and 1999, when growth was fully evaluated in positions of market players weeks before the official decision.