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Fed is now hostage to markets, says UBS economist

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The US Federal Reserve is "very, very late" in raising rates, given that headline inflation will rise faster than what the markets wrongly expect, a senior economist at UBS said on Monday.

THE US Federal Reserve is "very, very late" in raising rates, given that headline inflation will rise faster than what the markets wrongly expect, a senior economist at UBS said on Monday.

"I think we now have a hostage crisis," said Paul Donovan, deputy head of global economics at the Swiss bank. "The Fed has made itself a hostage to financial markets, because (Federal Reserve chair Janet) Yellen has given the impression that financial markets play a role in the Fed's decisions."

The markets are not adjusting to the revisions in US economic data - which are more frequent and more dramatic than have traditionally been the case - said Mr Donovan, who was speaking to media in Singapore. "If financial markets are overreacting to unreliable data, this potentially could be quite dangerous."

Mr Donovan expects that the Fed will raise rates in December this year. The Fed chose not to hike rates at the Federal Open Market Committee meeting late last week.

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