Goldman Sachs says Fed may delay rate increase well into 2016

[SYDNEY] Goldman Sachs Group says there's a chance the Federal Reserve will delay its planned interest-rate increase well into 2016, or even later.

While a December liftoff is still the company's central forecast, a slowdown in output and employment may justify policy makers keeping the near zero rate policy for "much longer, well into 2016 or potentially even beyond," Jan Hatzius, the bank's New York-based chief economist, wrote in a note to clients. Futures traders have been trimming bets the Fed will boost rates this year even as officials including chair Janet Yellen and William C Dudley have said they expect to act in 2015. Kansas City Fed president Esther George and San Francisco Fed President John Williams are scheduled to speak Tuesday.

The probabilitythe central bank will act rates this year has dropped to 35.2 per cent, from 60 per cent odds at the end of August, according to futures data compiled by Bloomberg. The calculations are based on the assumption that the effective fed funds rate will average 0.375 per cent after liftoff, versus the current target range of zero to 0.25 per cent.

The chance of a move by the next meeting on Oct 27-28 have declined to just 10 per cent following a monthly jobs report last week that showed US employers added fewer workers than economists forecast and wage growth stalled.

"After you get a weak employment number, it's very tough for them to hike rates," said Hideo Shimomura, chief fund investor in Tokyo at Mitsubishi UFJ Kokusai Asset Management, which oversees US$100 billion. "I'm betting on no hikes for the foreseeable future." Treasuries advanced on Tuesday. The benchmark 10-year note yield fell two basis points to 2.04 per cent as of 11:15 am in Tokyo, according to Bloomberg Bond Trader data. The price of the 2 per cent security maturing in August 2025 rose 5/32, or US$1.56 per US$1,000 face amount, to 99 21/32.

The US is scheduled to auction US$24 billion of three-year notes on Tuesday, US$21 billion of 10-year securities the following day and US$13 billion of 30-year bonds on Oct 8.

US employers added 142,000 workers to payrolls in September, the Labor Department said Friday, below the median estimate of 200,000 in a Bloomberg survey of economists. Revisions cut a total of 59,000 jobs in the previous two months.

"Further bad news on output and employment could potentially result in quite a large shift in the monetary policy outlook," Goldman Sachs's Hatzius said. "The growth and labor market numbers over the next couple of months are therefore likely to be even more important than usual."

BLOOMBERG