Economists and future markets disagree on when the Fed will raise rates

Otmane El Rhazi from The Bullion Desk.

Economists forecast that the US Federal Reserve will raise short-term interest rates in September, while the future markets predict that the US central bank will delay until later in fourth quarter or even next year.

The members of the Fed’s policy board are locked in what has become an increasingly public debate on when will be the right time to raise interest rates, which have been near zero since December 2008.

At its last meeting, the Fed policy board removed all calendar references in its forward guidance and said that recent economic weakness might be “transitory” in nature. This means that bank is now entirely data dependent and a rate increase could happen at any future meeting.

Most everyone believes that a June increase is unlikely. The CME Group’s FedWatch put the odds of a rate increase at next month’s Federal Open Market Committee meeting at zero percent.

The CME Group FedWatch is based on 30-Day Fed Funds futures prices, which have long been used to express the market’s views on the likelihood of changes in US monetary policy.

Meanwhile, the Wall Street Journal polled 62 business and academic economists – only seven percent of these respondents predicted a liftoff at the June 16-17 meeting.

Things get more interesting starting in September. About 73 percent of economists in the WSJ survey believe that the Fed will lift the federal funds rate in September, while eight percent see a October or December increase. Around seven percent think the bank will wait until next year.

The futures market, meanwhile, see the situation much differently. There is only a 18-percent probability that a rate increase will happen in September, followed by 35 percent chance in October and 49 percent likelihood in December, according to the CME Group’s FedWatch.

It’s not even a slam duck that a rate increase will happen in the first quarter of 2016, according to FedWatch. The odds for January and March of next year are only 65 percent and 74 percent respectively.

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