The Fed Has Something to Prove to Wall Street

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20-May (Bloomberg) — It’s hard to fault investors for being complacent when the Federal Reserve says it’s on the brink of raising interest rates again.

Policy makers have been delivering that message since the start of last year, only to later back off when the data showed they overestimated the strength of the U.S. economy. This scenario is playing out again in global markets. Even after the Fed’s minutes Wednesday sent a strong signal that an increase may come as soon as June, the bond market is only pricing in a 28 percent chance of that happening.

“The Fed and other central banks can get hawkish trying to manipulate the direction of rates, but the market says we don’t believe you,” said Steve Major, the London-based head of fixed-income research at HSBC Holdings Plc, which is one of the 23 primary dealers of U.S. government securities that trade with the Fed. “Structural headwinds to growth and the international backdrop are limitations on how far U.S. rates can go.”

While minutes from the Fed’s April meeting indicated policy makers considered a rate hike likely next month if the economy continued to improve, investors see plenty of obstacles. A referendum in Britain on June 23 will decide whether the country remains a member of the European Union. Growth momentum in China is fading following a credit-fueled rebound earlier this year and the dollar is rising again.

…So far, the markets have been right to call the Fed’s bluff. The Fed officials have cut their median forecast for the long-term fed fund rates to 3.25 percent, from as high as 4.25 percent in 2012.

[source]

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