Derivative markets suggest the Federal Reserve won't raise its target interest rate until after September 2015, as comments from Vice Chairman Stanley Fischer indicated escalating concern about growth outside the U.S.

Rates on federal fund futures show the likelihood of a September rate increase fell to 46 percent, down from 56 percent on Oct. 10 and 67 percent two months ago, according to data compiled by Bloomberg. The chance of an increase in October is 56 percent. The implied yield on the December 2015 Eurodollar contract, the world's most actively traded futures, traded at 0.82 percent, the lowest since May 2013 and down from 1.085 percent a month ago.

“If foreign growth is weaker than anticipated, the consequences for the U.S. economy could lead the Fed to remove accommodation more slowly than otherwise,” Fischer said in an Oct. 11 speech at the International Monetary Fund's annual meetings in Washington.

“Fischer made it clear that if the biggest economic area in the world is going through trouble, then that will affect the U.S. and impact their forecasts and they won't tighten so soon,” said Stan Jonas, who has been trading money-market derivatives since Eurodollars futures trading began in 1981, by telephone from New York. “The probability of the Fed's tightening priced in the market has been moved further out.”

Fed policy makers raised their median estimate last month for the federal funds rate to 1.375 percent by the end of next year, compared with a June forecast of 1.125 percent. The rate has been in a range of zero to 0.25 percent since December 2008.

Most economists predict the Fed's first rate increase will occur at a Federal Open Market Meeting that includes a press conference. Fed Chairman Janet Yellen is scheduled to speak to the press following the March, June, September, and December meetings in 2015. The Fed's target rate has been locked at zero to 0.25 percent since December 2008.

Fischer's remarks, echoed by other Fed officials, highlighted mounting concern about the improving U.S. economy's ability to withstand foreign weakness and a strengthening dollar. The comments came the same week that minutes of the Fed's September policy meeting showed authorities highlighting worries over the risks posed to their economy by deteriorating expansions abroad and a stronger dollar, which could hurt exports and dampen inflation.

The IMF last week reduced its forecasts for global growth in 2015, predicting it will be 3.8 percent, compared with a July forecast for 4 percent, after a 3.3 percent expansion this year. Europe's economy is forecast to expand 1.3 percent next year, down from the 1.5 percent rate forecast in July.

–With assistance from Christopher Condon in Washington.

Instant Insights /

At Least a Year Before Rates Rise

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