The market doubt about raising interest rates next year

In the past several days, the markets have become convinced Fed officials are intentionally signaling that they could pause from raising interest rates next year.

The recent speeches from several officials have been interpreted as being more dovish, even if the officials haven't strayed much from their core message — that the Fed is on a gradual rate hiking path, that the U.S. economy is in good shape, inflation is steady and the Fed remains dependent on economic data.

But the market also is interpreting a new tone in the words of these Fed officials, who seem to be more seriously looking beyond the strong U.S. economy to an environment where stock prices have been falling and credit spreads are widening.

Fed Chairman Jerome Powell, for instance, noted on Wednesday that there's been "a gradual chipping away" at global growth and what happens internationally matters. The same point was made Friday by Fed Vice Chair Richard Clarida, who told that the global economy deserves attention, and it looks like it's slowing.

Now, the markets still expect the Fed to go through with a rate hike at its December meeting, but the three more hikes anticipated for next year are in doubt.

Financial conditions are clearly worsening, with the S&P 500 down 7.5 percent since the end of September, and the spreads on corporate credit widening, meaning the market is pricing it at increasingly lower prices [and higher yields], relative to Treasurys. Prices move in the opposite direction of yields.

Rissmiller has been forecasting the Fed will only be able to raise interest rates twice next year, as some others also expect. He said the neutral rate, or the interest rate level where the Fed is no longer stimulating the economy or trying to slow it down, is probably closer to 2.5 percent. The Fed funds target range is currently at 2 percent to 2.25 percent.

Source: CNBC

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