Tags: bond | dealers | fed | zero

Bond Dealers: Fed Will Stay At Zero Through 2009

Tuesday, 16 Jun 2009 11:28 AM

By Dan Weil

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While federal funds futures contracts predict the Federal Reserve will raise rates by November, 15 of the 16 Wall Street firms that trade bonds directly with the Federal Reserve disagree.

They say interest rates won’t be lifted this year, Bloomberg reports. The fed funds rate currently stands at zero to 0.25 percent.

Earlier this week, fed funds futures contracts indicated a 58 percent chance that the Fed will boost rates by November. That came after Friday’s employment report showed the smallest job loss in eight months.

The jobs report convinced some traders that the economy has bottomed.

But the 15 primary dealers disagree. The 16th didn’t comment.

“The market seems wrong on this one,” Eric Liverance, head of derivatives strategy for UBS, tells Bloomberg.

“High unemployment and a continued bad housing market will prevent the Fed from raising rates.”

UBS doesn’t expect a Fed rate hike until June 2010. HSBC thinks it will take even longer.

“The Fed is not likely to tighten this year or next because it still faces significant headwinds out of the financial and housing sectors,” Lawrence Dyer, an interest-rate strategist for HSBC, tells Bloomberg.

Pimco, manager of the world’s biggest bond fund, also doesn’t expect the Fed to move anytime soon.

“Rate hikes will be some time in coming,” Pimco managing director Andrew Balls writes on the company’s Web site.

Pimco CEO Mohamed El-Erian says the economy’s “new normal” is growth of 2 percent or less.

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