The U.S. Federal Reserve must do a lot of work to convince skeptical markets that interest rate hikes are in the cards, Mark Zandi, chief economist at Moody’s Analytics, told CNBC’s “The Rundown” on Friday.
“Markets still aren’t quite convinced. They haven’t bought into the Federal Reserve’s forecast, my forecast, for the path for future interest rates,” Zandi said.
So far, markets have been pricing in a less than 50 percent chance of an interest rate hike in December.
“The Fed will have to do some work here,” he said. “I think, though, they’ll probably wait until the September meeting to start doing that jawboning, to lay the foundations to try to get market expectations more consistent with what the Fed is expecting.”
At the meeting set to begin September 19, the Fed was widely expected to begin winding down its $4.5 trillion balance sheet, which was mainly a portfolio of bonds accumulated following the global financial crisis and Great Recession.
Zandi said that with the U.S. economy performing “very well,” and unemployment around 4 percent and falling, it was time for the Fed to act.
“I think there’s a lot of pressure on the Federal Reserve to normalize monetary policy,” he said, adding that Fed chief Janet Yellen has “got a pretty strong case to make that it’s time for the Fed to normalize monetary policy in a more consistent way going forward.”
But Zandi said he didn’t expect Yellen’s speech at the Jackson Hole symposium would move the needle much on the Fed’s script.
The symposium, which begins Friday, convenes economic experts from around the globe and is hosted by the Kansas City Fed.
Zandi added, however, that there were some potential rocks on the tracks that could derail the Fed’s timeline, citing the need for the U.S. Congress to raise the Treasury debt limit and pass a budget to prevent a government shutdown.
At the Jackson Hole symposium, markets would also be reading the tea leaves on comments from European Central Bank chief Mario Draghi, particularly for clues on when he planned to taper asset purchases under the Bank’s quantitative easing program.
Zandi said he didn’t expect Draghi would comment on monetary policy in any significant way.
But he added that Draghi might make “roundabout” comments on the recent strength of the euro, which has appreciated by around 12 percent against the dollar so far this year.
“Exactly how he articulates that will be important,” Zandi said.
“If he argues that the euro can’t have a significant impact, that might suggest that the ECB will go slow in terms of winding down its quantitative easing and ultimately normalizing policy,” he said.
“If he talks about the euro rise more in the context of ‘this isn’t going to have that big an impact on growth,’ then that might suggest he’s preparing markets for the likelihood he’ll announce some winding down of the QE as we move into next year.”