Newspaper article THE JOURNAL RECORD

Investor Fears of Fed Rate Hike Subside "The Fed Has to Be Happy with How Things Are Working out in Terms of Moderate Growth and Low Inflation"

Newspaper article THE JOURNAL RECORD

Investor Fears of Fed Rate Hike Subside "The Fed Has to Be Happy with How Things Are Working out in Terms of Moderate Growth and Low Inflation"

Article excerpt

NEW YORK -- Investors are less concerned that the Federal Reserve will raise interest rates before June, according to financial market indicators.

The surprise 0.3 percent decline in producer prices in January, and expectations that today's consumer price index won't show much of a rise, are easing concern that robust economic growth will prompt the Fed to lift rates.

"The Fed has to be happy with how things are working out in terms of moderate growth and low inflation," said Wayne Schmidt, who manages about $350 million at Advantus Capital Management in St. Paul, Minn. The higher-than-expected 4.7 percent annual growth rate in the fourth quarter, and evidence of rising wages, spurred worries that the Fed would push borrowing rates higher to keep the economy from overheating. That concern has since eased, with the yield on the benchmark 30- year bond falling almost 40 basis points to 6.55 percent over the past three weeks. "The expectation for higher rates is getting priced out of the market," said David Schroeder, who helps manage $12 billion in bonds for American Century Benham in Mountain View, Calif. That's reflected in futures on Eurodollars, or dollars on deposit outside the country. The contracts are among the most sensitive to Fed rate expectations. The implied yield on the June contract for three-month Eurodollars was 5.58 percent, or about 0.10 basis points more then the current 5.48 percent rate for three-month borrowing. That's down 0.04 basis points from last week, implying that investors see less than a 50-50 chance the Fed will boost rates by a quarter point before the contract expires on June 16. The implied yield on the September contract is now 5.69 percent, suggesting investors see a good chance that the Fed will raise borrowing rates once before then. The difference in yield, or spread, between two-year Treasury notes and the Fed funds target rate has also narrowed more than 30 basis points in the past few weeks to 52 basis points, a further sign fewer traders expect the Fed to boost rates soon. The average spread between the fed funds target and the two-year notes has been 70 basis points during the past year. …

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