Bond Traders Win Over Economists as Fed Calls Pushed Out to 2016by
Deutsche Bank, BNP Paribas join chorus for central-bank delay
Swaps, futures point toward March as likely liftoff target
When it comes to timing the Federal Reserve’s first interest-rate increase since 2006, economists are beginning to see things the way bond traders do.
Deutsche Bank AG and BNP Paribas SA have pushed back their forecasts for the policy-rate move until March, matching levels projected by interest-rate swaps. Treasuries have returned 2.2 percent since midyear amid a slowdown in the economy and inflation. The Fed has kept its target for the benchmark federal funds rate near zero since 2008.
The two banks join Barclays Plc and Toronto-Dominion Bank in expecting the Fed to prolong its wait after recent data indicating continuing sluggish economic growth. All four banks are among the 22 primary dealers that trade with the Fed.
The bank moves mirrors one seen among policy makers themselves, who have lowered their forecasts for the fed funds target at the end of 2016 in each of the past four meetings. Fed policy makers’ median forecast for their overnight rate at year-end is 0.375 percent, down from the 1.125 percent they forecast at their December 2014 meeting.
“The market has led them,” said Christopher Sullivan, who oversees $2.4 billion as chief investment officer at United Nations Federal Credit Union in New York. “Yields have been coming down for longer than expectations for rate hikes have been pared. The Treasury market read this general slowing.”
The International Monetary Fund to cut its outlook for global growth this year to 3.1 percent from a July forecast of 3.3 percent.
Goldman Sachs Group Inc. chief economist Jan Hatzius said in a note to clients that a slowdown in output and employment may justify the Fed keeping the near-zero rate policy for “much longer, well into 2016 or potentially even beyond.” The bank, however, maintained its official forecast for an increase in December.
After the Fed’s Sept. 17 meeting, Chair Janet Yellen said most policy makers still expect a rate increase this year and that the U.S. economy is performing well. She reinforced that the path of rate rises would be gradual.
Interest-rate futures are pricing in a 39 percent likelihood of an increase by December, and a 62 percent probability of a move by March. The futures market first made March the most likely candidate for the lift-off date on Sept. 22. The calculations are based on the assumption that the effective fed funds rate will average 0.375 percent after liftoff, versus the current target range of zero to 0.25 percent.
BNP Paribas pushed back its forecast to March from December after the Labor Department’s Oct. 2 report showed the economy added 142,000 jobs in September, less than the 201,000 median forecast of economists in a Bloomberg News survey.
Strength in the dollar may slow U.S. economic growth by one percentage point, Deutsche Bank economist Joseph LaVorgna wrote in a note Tuesday. Next year, lower energy prices will boost consumer spending, the labor market and housing, giving the Fed ammunition to raise rates in March, he wrote. Deutsche Bank previously forecast a December rate increase.