The Federal Reserve may keep its key interest-rate at almost zero until 2015, a year longer than policy makers announced in January, according to Deutsche Bank AG’s Tom Hartnett.
The U.S. central bank has maintained its target rate for overnight loans between banks at zero to 0.25 percent since December 2008, as the economy recovers from the worst recession since the Great Depression. The Fed also bought $2.3 trillion of bonds in two monetary stimulus programs that have become known as quantitative easing from December 2008 until June 2011 to spur growth and prevent deflation.
Policy makers are likely monitoring housing and stock prices and are unlikely to pursue more easing through securities purchases, Hartnett, managing director and head of rates for North America at Deutsche Bank Securities in New York, said yesterday in an interview, citing the firm’s trading views.
“From a Fed reaction function, what we’re really looking at are the two things that matter to household balance sheets, which are home prices and the stock market,” he said. “Those are the two big assets on anyone’s balance sheet.”
Contracts to buy previously owned homes rose 5.9 percent in May, matching a two-year high reached in March, the National Association of Realtors reported last week. Purchases of new U.S. houses rose in May to a two-year high, the Commerce Department said June 25. The Standard & Poor’s 500 Index of stocks has climbed 7.8 percent this year including reinvested dividends.
“The hurdle is reasonably high for quantitative easing,” Hartnett said. “If stocks hang around here and the economy muddles along, it’s hard to see a case where the Fed would act.”
The yield on Treasuries due in 10 years will likely climb to about 2 percent at the end of the year, Hartnett said. If the economy undergoes an unexpected shock, or so-called tail risk, the yield may fall below 1 percent, he said.
The U.S. 10-year yield was little changed at 1.50 percent at 10:43 a.m. New York time, according to Bloomberg Bond Trader prices. It touched 1.49 percent, the least since June 4, after reaching an all-time low of 1.44 percent on June 1.