The end of Ben S. Bernanke’s term as Federal Reserve chairman in January 2014 hasn’t stopped investors from betting the central bank will hold the benchmark interest rate close to zero into the following year.
Bond-market measures from overnight index swaps indicate no increase in the federal funds rate until mid-2015, compared with the central bank’s current view that the rate will probably stay low at least through late 2014. The gap between two- and five-year Treasury yields, which shrinks when traders expect benchmark rates to remain subdued, is more than 50 percent narrower than its average since 2008.
Fed officials have discussed how to make their interest-rate guidance more explicit, according to minutes of the July 31-Aug. 1 FOMC meeting. One “particularly effective” approach may be to pledge “a highly accommodative stance” of policy “even as the recovery progressed,” according to the minutes.
“The combination of both talking about what you’re trying to do longer-term and also doing something right now in the short-term is the way to be more effective,” said Hamilton, who has been a visiting scholar at the Fed board in Washington.