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Fed’s Brainard warns against rush to raise US interest rates

Market analysts lower estimate of rate rise in Fed’s September 20-21 meeting

PUBLISHED : Tuesday, 13 September, 2016, 3:03am
UPDATED : Tuesday, 13 September, 2016, 3:20am

US interest rate futures prices rose on Monday, diminishing the implied probability of a rate hike by the US central bank next week, after Federal Reserve Governor Lael Brainard warned against a rush to raise interest rates.

The comments from Brainard had been highly anticipated through the day as she will be among the last Fed officials to speak before they enter their quiet period ahead of their next policy meeting on September 20-21.

Some analysts raised the probability Brainard, who is known for her easy policy stance, would use Monday’s speech to hint the central bank would raise interest rates next week from its current target range of 0.25-0.50 per cent.

“This hypothesis always struck me as preposterous,” Stephen Stanley, chief economist at Amherst Pierpont Securities, wrote in a research note. “She spins any fact, positive or negative, as a reason to stay easy.”

In her speech to the Chicago Council on Global Affairs, Brainard cautioned against raising interest rates too quickly due to potential weakness in the labour market and risks of economic weakness overseas.

“Today’s new normal counsels prudence in the removal of policy accommodation,” she said.

Brainard’s remarks pushed prices for federal funds futures higher across the board. Higher prices imply a lower probability of an increase in interest rates.

Earlier, Federal Reserve Bank of Atlanta President Dennis Lockhart repeated his call for a “serious discussion” about raising interest rates at the U.S. central bank’s meeting later this month, even after some recent disappointing economic indicators.

“Notwithstanding a few recent weak monthly reports -- from the Institute for Supply Management, for example -- I am satisfied at this point that conditions warrant that serious discussion,” Lockhart said Monday in Atlanta.

The September fed funds contract gained an additional 1.0 basis point following her comments. That implies a probability of just 15 per cent that the Federal Open Market Committee will lift rates next week, compared with a probability of 24 per cent at the close of trading on Friday, according to CME Group’s FedWatch programme.

December’s contract rose 2 basis points, suggesting about a 55 per cent chance of a rate hike at that month’s meeting, compared with about 60 per cent on Friday.

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