Bond investors are betting that US interest rates willremain near historic lows following mixed signalsfrom the Federal Reserve, highlighting apersistentgulf in expectations between the central bank andmarkets.
A day after the Fed dropped its pledge to be [patient" over lifting rates, traders were bettingthat its key interest rate would be just 1.80 per cent by the end of 2017. Market rates roseyesterday but investors` forecasts are still well below the Fed`s own projections.
Tad Rivelle, chief investment officer for fixed income at TCW, said that the Fed was giving outconflicting messages on rates, describing its signalling as similar to a [Michael Jacksonmoonwalk".
[It looks like you are going one way but in fact you are moving in the other direction," he said.
Janet Yellen, the Fed chairwoman, said on Wednesday that the majorityof members of theFederal Open Market Committee were expecting rates to rise this year amid [considerableunderlying strength" in the economy.
However, a series of reductions in the Fed`s interest-rate projections alongside forecasts ofweaker growth and inflation prompted traders toconclude that the central bank was taking amore cautious view of the economy - even as it opened up its options on rates.
That suggested a move in June was now less likely and traders were betting that by the end ofthe year the funds rate would be about 0.50 per cent, representing a 0.25 percentage pointtightening.
The interplay between currencies and central bank policy has anchored US bond yields at lowlevels, bolstering market expectations that the pace of the next tightening cycle will bemodest.
Investors yesterday seized on the Fed`s decision to lower its estimate of the longer-term rateof unemployment to 5-5.2 per cent, suggesting that the US jobs market may have moreslack than previously believed and allowing the FOMC to keep rates lower for longer.
Ms Yellen also highlighted the impact of the soaring dollar on the Fed`sassessment of exportgrowth and inflation. While the dollar reflected the US economy`s strength, it would also act asa [notable drag" on net exports this year, she said, adding that it was pulling down importprices, pointing to low inflation for longer. The dollar had retraced most of itslosses in thewake of the FOMC meeting, and was up 0.8 per cent against a basket of rivals late yesterday.
Alan Ruskin, strategist at Deutsche Bank said: [From a pure financial standpoint, the dollar`sstrength has reached a magnitude that represents a drag on the economy."
Ms Yellen presides over a committee divided about when to lift rates: a day after her pressconference, the Chicago Federal Reserve warned that the Fed risked triggering adverseshocks by raising rates too soon.
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