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Wall St banks shift odds on rate hike

Sep 06 2015 16:30

New York - Wall Street's top banks still expect the Federal Reserve to raise interest rates this year, but their conviction around a September hike has decreased notably in the last month due to volatility in global markets, according to a Reuters poll conducted on Friday.

Ten of 17 primary dealers, or the banks that deal with the Fed directly, polled said they expect the Fed to raise rates in the fourth quarter of 2015 or later. By comparison, just 7 dealers now see a rate increase coming this month, whereas 13 had expected a September move in the early August Reuters poll. For a table of the poll results see

Nine participants said their conviction around a September hike decreased in the last month, after several weeks of selling in stocks and commodities markets worldwide, and concern about slowing global demand.

"Financial market concerns obviously were a negative, but signs of domestic momentum are multiplying," said Samuel Coffin, economist at UBS, in an email. UBS expects the Fed to raise rates in September.

Last week, Federal Reserve vice chair Stanley Fischer told CNBC that it was too early to decide whether the stock market activity had made what would be the first rate increase in nearly a decade less appealing.

The S&P 500 has lost more than 7% in the last month. Oil prices are higher, but still far below levels from earlier in the year, and investors are still fearful of more selling.

The rate hike decision "will break down to how commodities react between now and the September meeting, if there's a chance that they're going to hike. If commodities recover and stabilize then there's a chance; otherwise I don't think it's likely to happen," said Tom Simons, money market economist at Jefferies & Co in New York. The firm expects the first rate increase to come in December.

The survey was conducted following the latest nonfarm payrolls report released earlier in the day. The report showed that job growth slowed in August, but the unemployment rate dropped to a near seven-year low and wages accelerated.

On average, the probability for a September rate hike fell to 40%, 20 percentage points lower than the August probability among the primary dealers.

The median expectation among primary dealers is for the federal funds rate to end the year at 0.375% and 1.375% by the end of 2016, slightly lower than last month's expectations.

us  |  world economy  |  interest rates  |  federal reserve
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