September 8, 2014 / 5:06 PM / 5 years ago

Investors expect lower rates for longer than Fed itself: Fed study

The sun rises to the east of the U.S. Federal Reserve building in Washington, July 31, 2013. REUTERS/Jonathan Ernst

SAN FRANCISCO (Reuters) - Investors expect the U.S. Federal Reserve to keep interest rates lower for longer, and to raise them more slowly, than the makers of U.S monetary policy themselves expect, according to research published Monday by the San Francisco Fed.

Economists of top Wall Street firms, for instance, see the third quarter of 2015 as the most likely date of the Fed’s first rate rise, the paper said, and estimate the Fed’s short-term interest-rate target will be at just 0.75 percent at the end of 2015 and 2.13 percent at the end of 2016.

By contrast, Fed officials see rates at 1 percent by the end of next year and rising to 2.5 percent by the end of the 2016, the paper said.

“(M)arket participants currently are pricing in a lower path than the median (Fed official) projection, including a later liftoff date for raising the federal funds rate and a slower pace of tightening,” Jens Christensen and Simon Kwan, both economists at the San Francisco Fed, wrote in the paper. “The public also appears to be less uncertain about the future course of monetary policy than (Fed) participants.”

The research, which used evidence from economist surveys, futures contracts, and economic models based on swaps data, also found that investors are more certain about the future of rates than Fed policymakers.

A disconnect between public expectations of the U.S. central bank and policymakers themselves presents a challenge for Fed Chair Janet Yellen. The Fed will eventually need to raise rates, but will try to do so smoothly enough so as not to send the economy back into recession.

Any abrupt marketplace repricing of interest-rate expectations could make that task more difficult.

Although Yellen and other Fed officials have repeatedly emphasized that policy will be closely shaped by incoming economic data, the research published Monday suggests that investors may not have been listening.

Fed officials will release fresh forecasts next week when they hold a regular policy-setting meeting.

Reporting by Ann Saphir; Editing by Leslie Adler

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