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The U.S. Federal Reserve and the Bank of Canada are telling anybody and everybody that interest rates are unlikely to rise any time soon, but the bond market isn't listening.

While central bankers reiterate time and again that rates need to stay low to counteract the global slump, faint economic rays of light in recent days have eager traders betting that borrowing costs in Canada and the United States are going to rise much sooner than anybody expected just a few weeks ago.

Markets are now pricing in a better than 50-50 chance that the Fed will raise rates by a quarter percentage point by year-end.

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In Canada, where the Bank of Canada stated just last week that it plans to keep rates where they are until mid-2010, traders have nonetheless priced in similar odds that the central bank will drop that stance and move borrowing costs a quarter point higher by March.

An increase in central bank rates would have immediate ramifications for most everyone in North America, pushing up interest costs on lines of credit and floating-rate mortgages. Higher central bank rates would also raise bigger questions for the economic recovery because the slowing effect could snuff out any pickup in growth.

So who has it right? Most economists say the bond market is off base and while things are looking up, the economy isn't nearly strong enough to warrant higher rates.

"The Fed is going to wait until they are certain the economy is on stable footing before they start to raise rates," said Benjamin Reitzes, an economist at BMO Nesbitt Burns Inc. He doesn't foresee a Fed move until next year.

As for the Bank of Canada, its timetable will likely follow the Fed's because of the close ties between the two economies.

The Fed and the Bank of Canada have been very clear in their statements. The Bank of Canada has said it doesn't want to raise rates before mid-2010, and Dallas Federal Reserve Bank president Richard Fisher said last week that the Fed is leery about what would happen if it were to "withdraw too early."

"We just want to make sure we don't repeat the mistakes made in the 1930s and mistakes made by the others like the Japanese in the 1990s," Mr. Fisher said in a speech.

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The catalyst for the bond market's expectations of higher rates is a fear of inflation, sparked by rising commodity prices and signs that economic growth may rebound faster than expected.

The concern is that once growth resumes, all the money that central banks have pumped into the economy will lead inflation to take off. Only a few months ago many more people were worried about deflation and even a reprise of the Depression.

The preoccupation with inflation is doubly strange when coupled with the amount of slack in the economy. Most factories and businesses across North America are running well below capacity, so they won't be raising prices any time soon. Many employers have cut wages and retailers are dropping prices to draw in consumers, both of which should also keep inflation under wraps.

All this means "rate hikes will be some time in coming," Andrew Balls, an executive at Pacific Investment Management Company LLC, the world's biggest bond fund manager, said in a report yesterday.

Once growth does resume in earnest, it will take more than a few months to sop up the excess capacity in the economy, giving central bankers plenty of time to react, Mr. Reitzes said.

"If they leave the stimulus in there a little longer than maybe they should, the risk isn't that great on the inflation front and they can just raise rates faster when the time comes," he said.

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