Federal Reserve Risks Markets Shock With September Rate Hike

Re-Blogged From http://www.Newsmax.com

Janet Yellen will deliver “the biggest shock to markets since taking over as chair of the Federal Reserve” should the U.S. central bank raise interest rates this month, a Financial Times survey of Wall Street economists has found.

The FT reported that 85 percent of those polled expect the central bank to refrain from a rate hike at a meeting next week.

The central bank last raised borrowing costs in December, ending seven years of near-zero rates. Policymakers signaled in June they could still hike rates twice in what remained of 2016.

Policymakers will go into the meeting divided, with some concerned current low rates will fuel a surge in inflation while another camp has argued that the Fed should not rush to raise rates.

 Regardless, many experts believe the Fed’s willingness to move this month has been underestimated by other experts and investors, the FT reported.

“Given the recent communication from Fed officials, who have begun to signal that another hike in the near term is appropriate, we think the market has become too complacent,” economists at Goldman Sachs said.

Traders trimmed their odds for a September rate hike to 15 percent from 24 percent on Friday, according to CME Group. Investors still saw just higher than 50/50 odds for a December hike, Reuters reported.

More than 77 percent of those economists polled by the FT, including several who forecast the Fed will go this month, believe the central bank will only raise once this year.

“Several also downgraded their expectations for further tightening from the Fed next year, the survey found. The median projection showed two further increases, taking rates to 1.125 percent. However, the share of economists expecting more than half a percentage point of additional tightening in 2017 fell to 20 percent from 30 percent in the FT’s last survey in July,” the FT reported.

Meanwhile, Fed Governor Lael Brainard said on Monday that the Fed should avoid removing support for the U.S. economy too quickly. Experts say her comments solidified the view the central bank would leave interest rates unchanged next week

Brainard said she wanted to see a stronger trend in U.S. consumer spending and evidence of rising inflation before the Fed raises rates, and that the United States still looked vulnerable to economic weakness abroad.

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“Today’s new normal counsels prudence in the removal of policy accommodation,” Brainard, one of six permanent voters on the Fed’s rate-setting committee, told the Chicago Council on Global Affairs. Brainard did not comment on the specific timing of future rate policy changes but she held firm in arguing for caution in what could be the last word from a Fed policymaker before the central bank’s Sept. 20-21 meeting.

Brainard said the U.S. labor market was not yet at full strength, which means “the case to tighten policy preemptively is less compelling.”

Many other policymakers think the U.S. job market is near full strength and Fed Chair Janet Yellen argued in July the case for rate increases has strengthened.

“I think circumstances call for a lively discussion next week,” said Atlanta Fed President Dennis Lockhart, who will not be a voter at next week’s policy review but will participate in discussions.

Brainard said on Monday the labor market might still tighten further without putting pressure on inflation.

“The response of inflation to unexpected strength in demand will likely be modest and gradual, requiring a correspondingly moderate policy response,” she said.

U.S. stock prices rose following Brainard’s comments while the dollar weakened and yields on U.S. government debt fell. Traders trimmed their odds for a September rate hike to 15 percent from 24 percent on Friday, according to CME Group. Investors still saw just higher than 50/50 odds for a December hike.

The central bank last raised borrowing costs in December, ending seven years of near-zero rates. Policymakers signaled in June they could still hike rates twice in what remained of 2016.

Over the last year, Brainard has been one of the Fed’s most vocal defenders of low interest rate policy, arguing the United States is vulnerable to economic troubles in Asia and Europe.

She said on Monday the low interest rate policies across advanced economies could make the United States more vulnerable to spikes in the value of the dollar which could put downward pressure on inflation.

Republican Presidential candidate Donald Trump accused the Fed on Monday of keeping interest rates low because of political pressure from the Obama administration.

Minneapolis Fed President Neel Kashkari said “politics does not play a part” in the Fed’s deliberations and that current low U.S. inflation means there is no “huge urgency” to hike.

Inflation has been below the Fed’s 2 percent inflation target for the last four years.

Viewed as an influential voice of caution within the Fed’s Washington-based board of governors, Brainard was the U.S. Treasury’s undersecretary for international affairs from 2010 to 2013.

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