Janet Yellen has work to do if she’s going to convince the holdouts in the bond market that the Federal Reserve will raise U.S. interest rates this year.
A Morgan Stanley index based on futures trading shows the Fed won’t act until early 2016 while federal funds futures show the probability for a move in September of just 33 percent. The central bank chair, who’s scheduled to address lawmakers from Wednesday, said last week it will probably be appropriate to increase borrowing costs “later this year.”
The chances of that happening in the four remaining policy meetings of 2015 receded after a report on Tuesday showed retail sales unexpectedly dropped in June. Treasuries rallied, ending a three-day slide. The Fed’s preferred inflation gauge rose just 0.2 percent in May from the year before and has been below the 2 percent target for three years.
“For Yellen, it’s too early to give a clear signal,” said Piet Lammens, head of research at KBC Bank NV in Brussels, who nevertheless expects officials to raise rates twice this year, starting in September. “There are a lot of problems that can cause volatility in markets and in such a context where the U.S. economy is also maybe not yet in a very good shape. It’s too early for her.”
The benchmark 10-year note yield was little changed at 2.40 percent as of 6:55 a.m. New York time, according to Bloomberg Bond Trader data. The price of the 2.125 percent security due in May 2025 was 97 5/8.
Yields increases may be “blocked” at around 2.50 percent as investors await data that confirms that recovery is entrenched and demand for Treasuries is supported by external developments, from Greece’s crisis to China’s equities rout, Lammens said.
The Fed has kept its benchmark, the rate banks charge each other on overnight loans, in a range of zero to 0.25 percent since December 2008. It adopted the unprecedented stance to support the economy during and after the recession that began in December 2007 and ended in June 2009.
The rate will be 0.2 percent in three months and 0.34 percent in six months, according to data compiled by Bloomberg based on an analysis of market yields. Those figures are still below the level of 0.5 percent that would factor in the quarter-point increase the Fed normally uses.
Even among Fed officials, there’s disagreement on when to undo the emergency rate stance amid signs the world economy is losing momentum.
Kansas City Fed President Esther George said Wednesday it’s time for the central bank to raise rates, yet the U.S. will need accommodative policy for some time. Chicago Fed President Charles Evans last week repeated his call to keep the rate near zero until mid-2016.
Yellen will get a chance on Wednesday and Thursday to clarify her vision of potential rate increases.
For more, read this QuickTake: The Fed’s Countdown