As inflation eludes, US rate-hike bets lose shine

Gladys Abbott
June 12, 2017

"It is a little puzzling since chair (Janet) Yellen and others have said they are going to be data-dependent". Overall, more respondents viewed those risks as roughly balanced, compared with two months ago when they anxious more that higher-than-expected growth and inflation might disrupt the Fed's outlook.In response to a separate question, economists indicated the biggest risk to the Fed's economic outlook lay in the possibility that loose monetary policy might fuel asset bubbles that threaten financial stability.

One interesting twist is that the May consumer price and retail sales reports will be also be released on Wednesday morning during the Fed's two-day deliberations. The lowered rate-hike expectations since mid-March has helped to revive a bond market rocked by worries about a more aggressive Fed and higher inflation under President Donald Trump's policies. Speculators have piled on bets in the futures market that the Fed may slow its rate hikes in light of the disappointing inflation data.

Regarding plans to shrink the $4.5 trillion balance sheet, 67 per cent said the Fed would start after two more rate hikes, and, initially, reduce the balance sheet by $11 billion a month - $6 billion from Treasuries and $5 billion from mortgage-backed securities.

The FOMC will release its policy statement at 2 p.m. (1800 GMT) on Wednesday, along with Fed officials' latest quarterly economic and rate estimates.

The big question is whether the central bank will start the roll-off in September or December, assuming the economy stays on course.

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For the second time this year, the U.S. central bank appears poised to raise interest rates despite fresh signs that the world's largest economy is not in peak condition. But the market has its doubts, with traders putting only a 23% chance of a move at that meeting.

"We do not expect capitulation on the rate path at this meeting", said Krishna Guha, vice chairman of Evercore ISI.

The Board of Governors meet eight times a year to determine the economic situation, assess interest rates, and discuss domestic financial market conditions.

The Fed's official mandate is low and stable inflation as well as maximum sustainable employment.

Central bank inflation targets are commonplace around the world, and the basic idea is to create a mental anchor for businesses and workers that will keep inflation and expectations thereof from either rising or falling too quickly.

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