Fed guidance splits markets on rate rise and poses test for Yellen’s leadership

by | September 14, 2015 12:23 am

The Federal Reserve is heading into this week’s pivotal interest rate­ setting meeting with financial markets and Wall Street analysts deeply split over whether it will tighten monetary policy following weeks of mixed signals from the central bank.

Conflicting messages from a divided body of Fed officials mean futures traders are betting against the possibility of a rate increase, while nearly half of economists surveyed by Bloomberg expect the Fed to pull the trigger next week. Other analysts think the US central bank could hold steady until 2016.

Torsten Sløk, chief international economist at Deutsche Bank, said he was picking up “frustration and confusion” among investors. The uncertainty presents Fed chair Janet Yellen with a leadership test as she presides over a hugely contentious decision on Thursday, amid clashing data and heavy lobbying from across the globe.

If the Fed skips a September rise, it would create a communications challenge for Ms Yellen, who has advocated a rate increase in 2015 and would need to convince traders the Fed still meant business about lifting rates.

But the Fed’s failure to lay the groundwork for a move this week means that if it defies investors and lifts rates, there is a risk of a sharp reaction after a period of high volatility, investors said.

Some fret that a premature rise could imperil the US recovery. “We’re at a delicate point,” said Anne Richards, the investment chief of Aberdeen Asset Management. “I used to think that we’d be fine [if the Fed lifted interest rates] but I’m starting to worry about what a rate rise will do to the US economy.”

The futures market put odds of just 28 per cent on an imminent increase ­ even after Stanley Fischer, the Fed’s vice­chairman, indicated in August that a rate rise was on the table in September.

The two­-year Treasury yield hit a four­year high of 0.76 per cent, suggesting some investors believe an increase may yet be on the horizon. Falling commodity prices, inflation expectations and the rise in the dollar were all given as possible reasons for the Fed to sit tight. Futures traders put a 41 per cent chance of no move this year.

Hanging over the Fed’s talks is lobbying from around the world on how it should set policy. Global institutions including the International Monetary Fund and World Bank are urging it to hold fire given the possible risks.

Sam Fleming ­and Robin Wigglesworth