05 April, AtoZForex, London – Financial markets are more pessimistic on Fed rate hikes than the central bank itself in the pricing of US Fed fund rates, Chicago Fed President Charles Evans said on Tuesday.
“Market expectations are pricing in a 20 percent likelihood of things deteriorating from here,” said Mr. Evans, citing recent surveys. “I don’t have that outlook. In general, financial market expectations are more pessimistic than ours,” he added.
Markets pessimistic on Fed rate hikes
Evans also reiterated his call for two interest rate increases this year, although BNP Paribas is more pessimistic on Fed rate hikes – expecting none, but adding that the risks to his forecast for economic growth are skewed to the downside.
“A very shallow funds rate path, such as the one envisioned by the median FOMC participant, is appropriate,” Evans noted in a copy of the speech.
Although Mr. Evans does not a voting member this year, he does participate in the Fed’s regular policy meetings.
In March, the Federal Open Market Committee’s median forecast called for two rate hikes this year.
Evans also added that the Fed has to be proactive and aggressive to reach its inflation target of 2 percent.
“We expect inflation to stabilize by end of the year and edge higher next year, so we are looking at two rate hikes by end of the year. As far as timing, there may be one in the middle of the year and one towards the end but we cannot be sure.”
Lately the data out of US has been disappointing the market. While US inflation measures have shown little change, with the Fed’s preferred annual measure flat at 1.7% in February. Inflation around the globe remains subdued largely due to cheap energy prices.
Challenging China’s economic outlook
Following the first rate increase in a decade at the December FOMC meeting, the Committee became more pessimistic on Fed rate hikes, standing ground in January and again in mid-March, when it cited temporary factors of devalued energy prices and weakness overseas.
Evans also said that China’s economic slowdown would likely prove a stiff test to Beijing’s leaders.
“The China economic outlook is achallenging one. It’s very difficult for any economy over a long period of history to see that kind of transition without it being bumpy.”
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