US interest rates remain at zero

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Interest rates have been stabilised at zero for a total of 81 months by the US Federal Reserve and it is expected that it will remain this way for the foreseeable future.

Despite this, the Financial Times reports that many policymakers and economists predict one interest rate rise and four more next year. Alongside this, the Federal funds rate should be 2.5% – an estimate made for September by US central bank officials.

However, history has foretold that there is usually a large difference between the expectations of officials and the future of interest rates and the gap has increased further recently, which has resulted in embarrassment for the US central bank.

Chief investment officer at Prudential Fixed Income, Michael Lillard, believes that even though the Fed wants to raise rates this year, they won’t be able to. “They could even not go next year. The data hasn’t borne out hiking in 2015 and it could again in 2016. It’s not our base case, but it’s certainly a possibility,” Lillard said according to the FT.

Projections between the market and the Fed will have to be synonymous and therefore, US Treasury market yields are currently at 2.04% and the average forecast for the ten year yield is now 2.32% at the end of December.

The FT also quoted John Briggs, head of US strategy at RBS, who said that US treasuries remain the high-yield instruments of global government bond markets which mean that it is hard to be negative about them. As well as this, head of fixed income research at HSBC, Steven Major, believes that the ten year yield will stay steady until the end of the year and then decrease by 1.5% by the end of 2016.

“The problem is that it might already be too late, as the start of the next recession is probably much closer than the end of the last one. The Fed has consistently said that the path of rates will be shallow when lift-off finally comes. In fact we see the risks of a reversal of any hike increasing with time,” Major said.

 

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