The guessing game over U.S. interest rates is likely to intensify this week after new Fed Chair Janet Yellen raised the prospect of a hike early next year, while Russia’s annexation of Crimea will keep investors focused on its next move.
In a week heavy with diplomacy – U.S. President Barack Obama will meet Chinese counterpart Xi Jinping on Monday in The Hague – markets will seek clarity from the U.S. Federal Reserve on its monetary policy and from Russia over its intentions in Ukraine.
While the U.S. data calendar is relatively light, Yellen has got investors talking by suggesting interest rates could start rising next spring, compared with most economists’ expectations for the second half of 2015.
The question is whether the host of Fed policymakers due to speak this week, including the Fed’s Chicago President Charles Evans, will try to distance themselves from Yellen.
“We have to consider the possibility of the first rate hike coming in April 2015,” said James Knightley at ING in London. “Market pricing is still favoring the third quarter of 2015, but a decent rise in employment and business activity may see this change,” he said.
Last week the Fed, in its first policy-setting meeting under Yellen, said it would factor in a wide range of economic measures as it judged the correct timing for raising rates.
Investors are wondering how much of the slowdown in the U.S. economy this winter was due to bad weather. Data this week may not clear up that uncertainty because home sales, goods orders and consumption data will be from February, rather than March.
Still, a Reuters survey of economists shows that Yellen’s comments have not altered their views. Ten dealers of 17 polled see rate hikes in the second half of 2015, with another four saying increases would not start until 2016.