Fed's message of no rate hike until 2015 is sinking in: study

Mon Nov 18, 2013 1:49pm EST
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By Ann Saphir

SAN FRANCISCO (Reuters) - The Federal Reserve has effectively communicated its commitment to ultra-easy policy, so that economists and traders correctly understand that interest rates will likely stay near zero until "sometime in 2015," according to a Fed study published on Monday.

The paper, published in the latest Economic Letter from the Federal Reserve Bank of San Francisco, looks in detail at data through late May. At that time, the researchers said, investors and economists expected a first Fed rate hike around mid-2015, based on economist surveys and Treasury yields interpreted in light of near-zero rates.

Although the paper does not explicitly say so, the decline in market rates since May -- when Fed Chairman Bernanke offered a timeline for the end of the Fed's massive bond-buying program that now sees too aggressive -- suggests that traders may now see the Fed's first rate hike as coming even later.

Convincing the public that the U.S. central bank will keep rates low for a long time is a key pillar of the Fed's super-easy monetary policy, which seeks to stoke investment and hiring by keeping borrowing costs down.

Economist surveys and U.S. Treasury yields both show that most are buying the idea that low rates are here to stay for quite a while, the paper said.

"Our estimates suggest that the (Fed)'s forward guidance has been effective in pushing out the expected liftoff horizon, which has contributed to lower interest rates, easing financial conditions and adding stimulus to the economy," wrote San Francisco Fed economist Michael Bauer and the bank's research director Glenn Rudebusch.

"Recent estimates of policy liftoff generally suggest the first funds rate hike will occur sometime in 2015."

The authors cautioned that reading expected future rate rises in the Treasury yield curve requires more finesse than simply looking at the first point on the graph where Treasury yields suggest rates could rise.   Continued...

A general view of the U.S. Federal Reserve building as the morning sky breaks over Washington, July 31, 2013. REUTERS/Jonathan Ernst