A majority of Wall Street’s top bond firms do not expect the US Federal Reserve to raise interest rates before the second half of next year, and most also now believe the Fed is not likely to start shrinking its massive balance sheet before it lifts rates, a Reuters survey showed on Friday.
Eleven of 18 primary dealers, or the banks that deal directly with the US central bank, said the Fed’s first rate increase would occur between July next year and June 2016, the survey found. All but four of the 22 primary dealers responded to the survey.
This view that the current ultra-loose monetary policy would continue for some time persisted in the wake of Friday’s monthly employment report, which showed employers added more than 200,000 jobs for a fourth straight month last month.
While supporting the notion the US economy is on a steady footing, it also suggests it is not growing quickly enough to rush a “lift-off” in Fed policy rates, analysts said.
“It doesn’t change much on the policy front,” Thomas Simons, money market strategist at Jefferies & Co in New York said of the government’s latest payrolls report.
Economists remain concerned about meager wage gains and the disappointing level of job creation in higher-paying industries. Some Fed policymakers recently signaled that these soft patches in the labor market would likely cause the Fed to leave rates at their historic lows for longer.
“All the chatter from them has been lower rates for a longer period,” Simons said.
As the Fed has been winding down its third round of the large-scale bond purchases this year, some Fed officials in recent weeks have cautioned against ending reinvestments of Treasuries and mortgage-backed securities before a rate hike. They said such a move might spook traders and disrupt markets.
In the latest survey, 12 of 17 Wall Street firms expected that the Fed would stop reinvesting the proceeds from maturing bonds it holds on its US$4.3 trillion balance sheet after or around the same time as the first rate increase. A month ago, 14 of 16 primary dealers polled expected such a move by the end of next year.
Most dealers said that when the Fed does raise rates, it would stop using a range for the US federal funds rate and return to targeting a specific rate level, as it customarily did before the financial crisis. Since December 2008, the Fed has targeted a range of zero to 0.25 percent for that key policy rate.
In Friday’s survey, seven dealers forecast that the Fed would adopt a rate target of 0.25 percent when it begins to raise rates, and seven projected that the target would go to 0.5 percent. Just two saw the Fed sticking with a rate range, with both of those dealers seeing the range lifted to 0.25 to 0.5 percent.
Regarding the Fed’s progress in its tightening regime, most dealers expect policymakers to end rate increases at a lower level than in the past.
Among 15 primary dealers, their median forecast for the Fed’s long-term neutral target rate, which is seen as a level that promotes growth without firing up inflation, was 3.5 percent. This was below the current 4 percent estimate in the most recent statement from the Federal Open Market Committee, the central bank’s policymaking group.