Friday, May 23, 2014

Hilsenrath on "How High Will Fed Push Rates?"

From Real Time Economics' morning Grand Central post:
Investors are especially focused these days on where the Federal Reserve’s target interest rate is likely to end up in the years ahead. During the tightening cycle that ended in 2006 the Fed pushed its target fed funds rate up to 5.25%. In 2000 it pushed it to 6.5%. Fed officials say they don’t expect rates to go very high this time around because the economy will remain fragile for years after the 2008 financial crisis.
So how far will the Fed go?

For clues look at a survey conducted by the Federal Reserve Bank of New York of the 21 bond dealers through which it conducts its market operations. The primary dealer survey is fielded before every Fed policy meeting and released with a lag. The April survey, released earlier this week, shows bond dealers expected the fed funds rate to average just 2.75% for the coming decade. That projection includes an expectation of rates remaining near zero this year and then slowly rising starting in 2015 to 3.75% by the first half of 2018. Dealers don’t appear to expect the fed funds rate to get much higher than the 3.75% rate they foresee by 2018, given their low forecast for the entire decade.

The long-run path of the rate is getting attention in markets for a few reasons. First, the Fed drew attention to this point in its March policy statement, when it said officials believed rates would remain below the 4% level that they see as appropriate in the long-run, even after the unemployment rate and inflation get back to normal levels. Moreover former Fed Chairman Ben Bernanke appears to be hammering home this point in private meetings with investors of late....MORE