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Investors Skeptical of Fed Rate Increase Forecast

jarofcashA new survey from the Federal Reserve Bank of San Francisco finds investors aren't buying in to the central bank's projections of interest rate increases in the coming years.

In a study published September 8, analysts for the San Francisco Fed say their model — based on investor activity—forecasts a federal funds rate of 0.75 percent at the end of 2015 and 2.13 percent the following year.

In their latest economic projections from June, the members of the Federal Open Market Committee (FOMC) projected a median federal funds rate of 1 percent at year-end 2015 and 2.5 percent at the end of 2016.

Based on their own modeling, the analysts say investors put the probability of the federal funds rate hitting the FOMC's target next year at 31 percent, with 2016's projected rate having a 27 percent probability.

"Our analysis shows that, on balance, the public seems to expect more accommodative policy than FOMC participants," the researchers concluded.

The investor model also features a smaller range between the upper and lower forecasts than the predictions offered by Fed policymakers, "suggesting the public also may be less uncertain about their projections," they added.

The San Francisco Fed's report comes one week before the FOMC announces its next economic policy move—and before Fed Chair Janet Yellen is scheduled to give her own hints at the central bank's timeline.

Yellen and many of her colleagues have stressed a slow, thoughtful approach so as not to disturb the economic recovery. However, the fact that investors apparently anticipate an even slower run-up in rates could indicate their failing optimism in the economy's projected growth over the coming years.

About Author: Tory Barringer

Tory Barringer began his journalism career in early 2011, working as a writer for the University of Texas at Arlington's student newspaper before joining the DS News team in 2012. In addition to contributing to DSNews.com, he is also the online editor for DS News' sister publication, MReport, which focuses on mortgage banking news.
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