Fed’s Dudley, Kaplan fail to convince market Sept. rate hike is ‘on the table’

Commentary, News

Market ‘doesn’t believe the Fed,’ Deutsche Bank economist

dudly and kaplin

A pair of Federal Reserve officials, on separate visits to Asia, suggested overnight that the financial markets are too complacent about a September rate hike. However, investors back in the U.S. basically ignored the admonishments.

“The market doesn’t believe the Fed, it hasn’t been listening for a while,” said Joseph LaVorgna, chief U.S. economist at Deutsche Bank Securities Inc. in New York.

In a Bloomberg television interview from China, Dallas Fed President Rob Kaplan said a September rate hike “is very much on the table.”
New York Fed President William Dudley, in a speech in Indonesia, said he could definitely see the Fed raising interest rates even before the election. Many pundits and market participants have opined that the Fed, in an effort to appear apolitical, tends not to change rates during a presidential election. The presidential election is set for Nov. 8.

On Monday, both officials stressed data between now and Sept. 20-21 will be key to any decision.

After Kaplan and Dudley spoke, the Institute for Supply Management reported that its manufacturing index slipped only slightly to 52.6 in July from 53.2 in the prior month.

Alex Holmes, an economist for Capital Economics, said the data should ease fears that the economy is heading for a serious downturn.

The weak second-quarter gross domestic product report released late last week sparked concerns about the economy and bolstered doubts about a September move.

The report , which showed the economy has only grown at a 1% rate over the last three quarters, “makes a September increase in the fed-funds rate even less likely,” said Stuart Hoffman, chief economist for PNC Financial Group.

Read: Q2 GDP closes door on Fed September rate hike

In the wake of Dudley and Kaplan’s speech and the ISM data, investors are pricing in a 18% chance of rate hike in September, LaVorgna said.

For December, the market views the chance of a rate hike at a little more than one of three.

It is not until September 2017 that the probability of a rate hike is over 50%.

“The Fed leaned the pain of becoming data dependent,” said David Donabedian,chief investment officer of Atlantic Trust Private Wealth Management.

LaVorgna said the Fed will try to accentuate the positive in the GDP data and “highlight pockets that weren’t horrible.”

But despite their protestations, the data “is just another reason to wait.”

What would it take to change the market’s complacency?

Only a speech by Yellen, LaVorgna said.

The Fed Chairwoman is scheduled to speak on Aug. 26 from Jackson Hole, Wyo.

Read this article in its original format at MarketWatch.com

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