Market sees even odds of rate hike by March 2015: Fed study


Investors saw a 50-50 chance at the end of last year that the Federal Reserve will start raising short-term U.S. interest rates by March 2015, according to a study published on Monday by the San Francisco Federal Reserve Bank.

That was sooner than investors had expected just a few months earlier, the study said, despite the fact that official Fed forecasts for the likely timing of rate "liftoff" barely budged. Only the most hawkish of Fed officials currently expect rate hikes to begin by March of next year.

The Federal Reserve
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("B)ond investor expectations for the date of exit have moved forward notably in recent months, probably because they anticipated the (Fed's) decision at its December 2013 meeting to cut back large-scale asset purchases," senior San Francisco Fed economist Jens Christensen wrote in the bank's latest Economic Letter.

Still, Christensen added, the timing is highly uncertain, with the odds of keeping rates at the current near-zero level past March 2015 identical to the odds of rates rising before then.

(Read more: Bonds beating stocks in far)

The analysis, which relied on Treasury bond yields of varying maturities, also suggested that investors are pricing in about a one-in-three chance of rates remaining at zero beyond 2015, longer than most Fed officials currently expect.

"This finding is consistent with the inherent uncertainty about the outlook for inflation and unemployment, the economic variables that guide (Fed) rate decisions," Christensen wrote.

Fed is encouraged by market: Pro

The study gets to the heart of the Fed's current dilemma as it seeks to end its bond-buying stimulus this year and yet still provide the economy the support it needs.

Fed officials worry that markets will price in a too-aggressive pace of rate hikes that could undercut the central bank's efforts to boost the economy.

(Read more: What Congress is likely to hear from Yellen)

Complicating matters is a rapidly falling unemployment rate, which the Fed has used as a guidepost for rate policy.

The Fed now promises to keep rates near zero until well past the time that unemployment falls to 6.5 percent.

A January unemployment rate reading of 6.6 percent puts pressure on Fed Chair Janet Yellen to rewrite that pledge, perhaps removing any reference to a specific unemployment level and emphasizing that a rate hike is unlikely until inflation climbs back to healthier levels.

Yellen makes her first public remarks as Fed chair on Tuesday when she updates the U.S. Congress on the economic outlook and monetary policy.

—By Reuters