Fed Seen Reinforcing Guidance on 2015 Rate Rise After Jobs Data


Federal Reserve officials will step up efforts to prepare markets for an interest-rate increase next year, economists said, after data showed hiring in the U.S. surged the most in almost three years.
“If there’s going to be a move in June, they’ve got to prepare the battlefield, and that’s what you’ll see,” said Brian Jones, senior U.S. economist at Societe Generale in New York.
Fed officials will stress that policy depends on progress toward its goals of stable inflation and full employment, rather than the calendar, economists said. The reason: If market expectations are out of kilter with Fed intentions, the central bank risks an unwanted jump in bond yields reminiscent of last year’s “taper tantrum.”
“The markets seem to have bought into this idea that no matter what the economic data is, the Fed goes late in 2015,” said Neil Dutta, head of U.S. economics at Renaissance Macro Research in New York. He said he expects a first rate increase as early as March or as late as June.
A Labor Department report yesterday showed employers added 321,000 jobs to payrolls in November, the most since January 2012. The jobless rate stayed at 5.8 percent, a six-year low, while earnings rose by the most since June of last year.
“We had a strong unemployment report this morning,” Loretta Mester, president of the Cleveland Fed, said in response to questions yesterday after a speech in Washington. “As the economy continues to improve as we have seen, then I would think we would be raising rates sometime in 2015.”
The gap between the Fed’s own forecasts for the timing and pace of rate increases and market expectations narrowed slightly after the jobs report.

Eurodollar Futures

Eurodollar futures late yesterday implied a 1.73 percent federal funds rate at the end of 2016, up from 1.58 percent the day before. That’s still well below the 2.88 percent predicted in the median forecast from Fed officials in September, an outlook that also pointed to an initial rate increase in mid-2015.
The futures implied a 0.77 percent funds rate by the end of 2015, up from 0.64 percent yesterday.
The jobs report may prompt policy makers to drop their pledge to keep interest rates low for a “considerable time” when they meet Dec. 16-17, according to Terry Sheehan, an economic analyst at Stone & McCarthy Research Associates in Princeton, New Jersey.
The Fed kept the language at its last meeting in October after ending a bond-purchase program intended to boost the economy. At the same time, the Fed added an important qualifier: good economic data could prompt it to raise rates sooner, while disappointing figures could delay an increase.

Not Far

“They are hesitant to drop the ‘considerable time’ language because that would be interpreted, rightly or wrongly, as a signal that the Fed was getting ready to start hiking the fed funds rate,” Sheehan said. “But we are looking for mid-2015, and that just isn’t that far away.”
Fed officials want to avoid a repeat of the 2013 taper tantrum, when Treasury yields jumped after then-Chairman Ben S. Bernanke suggested the Fed might end its bond purchases sooner than investors expected.
Two of the most influential Fed officials this week stressed the Federal Open Market Committee’s decisions will be data-dependent.
Fed Vice Chairman Stanley Fischer said Dec. 2 the central bank would set monetary policy in line with economic performance.

Timing Judgment

New York Fed President William C. Dudley said Dec. 1 that “life is uncertain, and my judgment of the appropriate timing could change in response to incoming data and other factors” that change the economic outlook.
“The Fed is much more data-dependent than the market appreciates, and they will go sooner than the market anticipates,” Dutta said. “That’s going to create a lot of pain for bond investors.”
Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York, said the latest employment data should prompt the Fed to consider raising rates at its December meeting.
“This is not one number. The number of jobs created this year is 2.65 million. It hasn’t been this fast since 1999,” Rupkey said. “You’re going to find the opposition to raising rates is falling apart.”

Low Inflation

While employment gains will certainly please the Fed, the committee will remain concerned about inflation that’s likely to remain below its goal “for some time,” Ward McCarthy, chief financial economist at Jefferies LLC in New York, said.
The Fed’s preferred measure showed price gains remained at 1.4 percent in the 12 months through October. That marked the 30th consecutive month inflation fell below the central bank’s 2 percent target.
Rupkey, who predicts the FOMC will raise rates in March, said it would be a mistake for the committee to wait until wages and prices showed a strong move upward.
“It’s not about whether this policy will cause inflation,” he said. “It’s will this policy cause inflation two years from now.”


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