Slim Majority of Bond Dealers Expect a Rate Increase
Will they or won’t they? They will, says a survey of government bond dealers.
Federal Reserve policymakers, meeting in Washington today, will raise the central bank’s benchmark short-term interest rate from 5.25% to 5.5%, the majority of dealers say.
But it’s a slim majority: 16 who see an increase, versus 14 who don’t, among the 30 “primary” bond dealers--the Wall Street giants that do business directly with the Fed.
That’s the most evenly divided dealer survey of the Fed’s intentions in at least a year and a half.
“The call involves a lot of guesswork because there are very strong arguments in favor of both sides,” said Anthony Karydakis, an economist at Banc One Capital Markets in Chicago, one of the dealers surveyed. “Either outcome is equally possible and legitimate.”
A quarter-point increase would return the federal funds rate--the overnight loan rate among banks, which the Fed controls--to where it was before Russia’s bond default and hedge fund Long-Term Capital Management’s near-collapse prompted three rate cuts late last year.
Dealers arguing for a rate increase cite potential inflationary pressures from the low unemployment rate, the still-strong economy and the fresh rebound in oil prices, which hit multiyear highs on Monday.
Those calling for no Fed move point out that prices on goods and services haven’t picked up much, even with the economy’s strength. Jobs, housing, manufacturing and productivity reports have signaled tame inflation.
“Usually, we go into the meeting with pretty clear signals [from Fed officials] as to what they’re going to do,” said Karydakis. “This time around, they have been conspicuously silent, which may reflect their own ambivalence. I genuinely believe many policymakers are undecided.”
Standing pat would likely put the Fed on hold at least through January. The Fed is expected to hold rates steady at its last meeting of the year (Dec. 21) to avoid exacerbating any computer problems stemming from the transition to the year 2000.
