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Nobody is expecting the Federal Reserve to change its target Fed funds interest rate on Wednesday. It will remain at 0.25 per cent after the federal open market committee meets.
But there has been a flurry of speculation that the Fed will hint that the “exit strategy” from its loose monetary policy will come sooner than once thought. Last Friday’s payroll report for July, which showed joblessness rising slower than expected, egged this on.
Two-year bond yields, sensitive to short-term rate expectations, show this clearly. They hit 1.3 per cent on Friday, up from 0.9 per cent only weeks ago. They have since subsided below 1.2 per cent.
Trading in Fed funds futures contracts say the same thing: their implicit forecast is that the Fed will have moved to 0.4 per cent by its January meeting. Straight after the employment report, this stood at 0.49 per cent, or a virtual certainty that the exit strategy will be under way within six months.
This is an echo of the aftermath of the May jobs report, which was also strong (and followed by a disappointing report for June). Then, two-year yields rose from 0.9 to 1.4 per cent, before coming all the way back to 0.9 per cent a month later.
So the market is already backtracking, but clear guidance from the Fed would have a big impact.
A better view on exit strategies might come from Norway’s Norges Bank, which also meets on Wednesday. The krone is an oil-backed currency and has moved in line with risky assets during the crisis. Norway, with Australia, is widely expected to be one of the first developed countries to start raising rates.
The krone has sold off this week, because Norwegian inflation is staying lower than thought. But Norges Bank may still be better placed than the Fed to give a clue on the timing of exit strategies.