Goldman Sachs Group Inc. says investors shouldn’t rush to anticipate a rate increase from the Federal Reserve after jobs gains beat economist forecasts. BlackRock Inc. said it’ll happen sooner than expected.
“Not so fast,” Jan Hatzius, the chief economist at Goldman Sachs in New York wrote in a report. Labor-market slack will help keep the Fed from raising borrowing costs until the third quarter of next year, according to Hatzius. Goldman, which gets the largest share of revenue from trading among U.S. banks, is one of the 22 primary dealers that trade directly with the central bank.
“The Fed’s going to move faster than people think,” BlackRock’s chief investment officer for fundamental fixed income Rick Rieder said Oct. 3, reiterating an earlier view. “We have an economy today that’s going, we think, quite strong,” he said on Bloomberg Television’s “Market Makers” with Erik Schatzker and Stephanie Ruhle. The company’s $4.32 trillion in assets make it the world’s biggest money manager.
The division highlights the dilemma Fed Chair Janet Yellen faces over when to raise borrowing costs from the record low while growth is uneven. Ten-year U.S. yields have fallen more than half a percentage point in 2014 as investors sought the relative safety of government debt amid concern the economy is performing below its potential. The yield was little changed Monday at 2.44 percent as of 6:57 a.m. in New York.
The U.S. added 248,000 jobs in September, the Labor Department reported Oct. 3, compared with 215,000 projected by a Bloomberg News survey of economists. The jobless rate fell to 5.9 percent from 6.1 percent.
Trader Expectations
While hiring picked up, reports on Oct. 1 showed U.S. manufacturing growth slowed in September and data on Oct. 3 showed wage growth stagnated.
The implied yield on 30-day federal funds futures expiring in October 2015 was 0.565 percent, indicating traders expect the central bank to increase the target for its main interest rate from the current range of zero to 0.25 percent by then.
“We are looking for the Fed hike to come in the third quarter of next year,” said Richard Kelly, senior rates strategist at Toronto-Dominion Bank in London. The market is trying to price in an earlier rate increase and “that strong employment report was helpful but we know the Fed is much more wary of broad-based measures. The wage data did disappoint and you only care about the labor market to the extent that it’s generating wage growth. If that’s delaying, it can keep the Fed on pause for a little bit longer.”
Benchmark Estimate
Fed officials in September boosted their median estimate for the benchmark for the end of 2015 to 1.375 percent, compared with 1.125 percent in June. They have kept their target for the rate that banks charge each other on overnight loans close to zero since December 2008.
Last month, policy makers also trimmed their monthly bond purchases for a seventh straight time, staying on course to end the program this month. They kept their pledge to maintain interest rates near zero for a “considerable time” after the asset buying stops.
The Fed will probably keep the language in its statement after its next meeting Oct. 28-29, Goldman’s Hatzius wrote.
Fed Bank of St. Louis President James Bullard said last month the October meeting would be a “natural juncture” for ending the pledge.
For BlackRock, the threat of higher short-term yields means it prefers long-term Treasuries and municipal bonds in the U.S., Rieder said.
“We’ve been stubbornly adamant” in calling for an early rate increase, he said.