Federal Reserve Bank of Richmond President Jeffrey Lacker said today the U.S. central bank would likely need to raise interest rates next year.
"My current assessment is that an increase in interest rates is likely to be necessary some time in 2013," Lacker said in a statement on the Richmond Fed's website. He explained why he cast the sole dissenting vote on the FOMC's March 13 statement that economic conditions are likely to warrant "exceptionally low" levels of the federal funds rate at least through late-2014.
"The economy is expanding at a moderate pace, and inflation is close to the committee's 2 percent objective," Lacker said. "As the expansion continues, the federal funds rate will need to rise in order to prevent the emergence of inflationary pressures."
The forward OIS rates as well as implied yields on federal funds and Eurodollar futures contracts, which are used to gauge where traders speculate on the path of the Fed's target rate, all rose this week. Both futures contracts trade on the CME Group exchange in Chicago in terms of price for an implied yield. Eurodollars are based on prediction for the three-month dollar London interbank offered rate, while fed funds contracts are bets on the Fed effective rate.
Fed funds futures, which were first offered on the Chicago Board of Trade in October 1988, indicate that traders bet the effective rate will average 0.44 percent during the month of November 2013. That's up from an implied rate of 0.29 percent at the start of this month. The effective rate averaged 0.11 percent over the past month.
"This week has really been about people getting shaken out of their complacency and having to exit some trades that were based on nothing happening with Fed rates," said Alexander Manzara, a Chicago-based futures broker at TJM Institutional Services, in a phone interview. "It's not that the market has come to an idea that the Fed may move to raise rates sometime quickly. It's about disappointment with the idea that QE3 is not imminent and that the U.S. data has been a little bit better."