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Threat of Fed rate hikes continues to fade

Federal Reserve Board Chairman Ben Bernanke.

GARY CAMERON/REUTERS

Tim Duy, like many economists, believes the market has moved on from concerns about when the Federal Reserve will start to ease up on its bond-buying program, known as quanatitative easing or QE. Now, it's all about the first interest rate hike.

Until Fed chairman Ben Bernanke set the record straight last week, the market had begun to expect rate hikes to start considerably before 2015 – as in, next year. Mr. Duy, an economics professor at the University of Oregan, believes that Fed officials will continue to push back on expectations for a 2014 rate hike.

And he believes that a lot has to go right with the economy for that to change. Four things, in fact: The fiscal contraction would have to fade into the second half of the year, the housing market could not stumble with higher mortgage rates, the labour market would have to improve to the point where measures of underemployment also improve, and inflation would have to rise closer to 2 per cent.

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"I am reasonably confident that the effects of fiscal contraction will fade, and that the housing markets will continue to improve," he said on his blog. "As far as the other two points are concerned, I am wary of believing that even after taking fiscal policy and housing off the table, growth will be strong enough to drive the kinds of changes in labour markets and inflation dynamics that would induce the Federal Reserve to being normalizing interest rates in 2014."

Markets agree. The S&P 500, just a month ago reflecting investor concerns about a Fed bent on stimulus withdrawal, has now rebounded 7 per cent since June 24, to record highs. The yield on the 10-year U.S. Treasury bond has begun to retreat, falling to 2.54 per cent after hitting a two-year high of 2.74 per cent recently. And gold has begun to rebound, rising $84 (U.S.) an ounce from a recent low.

Meanwhile, investors will likely learn more about where the Fed stands on interest rates later this week: Mr. Bernanke is scheduled to appear before Congress on Wednesday and Thursday.

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About the Author
Investing Reporter

David Berman has been writing about business and investing since 1995. He has written for a number of magazines, including Canadian Business and MoneySense. He worked at the Financial Post as an investing writer and daily columnist before moving to the Globe and Mail in 2008. More

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