Wall Street economists are trading places on just when Janet Yellen will raise interest rates.
Reflecting how hard it is to call the timing of the Federal Reserve’s first rate increase since 2006, Citigroup Inc. revised its forecast on Thursday to show it happening in September rather than December.
By contrast, Goldman Sachs Group Inc. reacted to fresh comments from Chair Yellen by heading in the opposite direction, saying it now anticipated liftoff at the very end of the year, three months later than it thought beforehand.
With Yellen reiterating on Wednesday that the decision will be driven by economic data and playing down the importance of timing, the only safe bet may be to bank on more turbulent trading as the Fed ultimately aligns itself with one camp of economists over another.
The “case for September interest rate normalization gets stronger, but be prepared for rate volatility,” William Lee, head of North America economics at Citigroup in New York, said in a report to clients.
He pulled forward his forecast after deciding even moderate growth may be enough to lift the economy to its long-term trend, raising the likelihood of acceleration in inflation. Acting sooner than later also reduces the risk of too much money flowing into high-yielding assets, he said.
“With almost all market participants citing September as their most likely meeting for an increase, it would not be wise to frustrate such expectations unless the data flow changed in a clear and obvious way,” said Lee.
Disagreeing are Jan Hatzius and Zach Pandl of Goldman Sachs, who explained their new expectation of later action by noting seven members of the Federal Open Market Committee now project zero or one rate increase this year.
That’s up from three members in March and the economists think Yellen is among the doves after she said on Wednesday that officials are awaiting “more decisive evidence.”
“We had viewed a clear signal for a September hike at the June meeting as close to a necessary condition for the FOMC to actually hike in September because we did not believe the FOMC would want to surprise markets on the hawkish side,” said Hatzius and Pandl. “The committee did not lay that groundwork.”
To be fair to Wall Street, Fed policy makers are also struggling to divine the monetary policy they make.
As John Herrmann, director of U.S. rate strategy at Mitsubishi UFJ Securities USA Inc., observed, just six months ago there were nine FOMC members projecting between four and seven rate hikes in 2015 compared to none now.
“Talk about an absolute blunder of ‘forward guidance,’” he said.
© Copyright 2024 Bloomberg News. All rights reserved.