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Fed Will Have to Walk Tightrope to Raise Rates: Voya

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Voya Investment Management experts theorized when the Federal Reserve would raise rates, predicting it would happen later rather than earlier during a media briefing Tuesday morning in New York.

“The backdrop of slow global growth, low global inflation, policy tools being very limited … and this income divide will all lead to — just my personal view — is a first-quarter 2016 tightening, earliest December 2015,” said Christine Hurtsellers, chief investment officer of fixed Iincome and proprietary investments.

Meanwhile, according to a Reuters poll, Wall Street’s biggest banks believe the Federal Reserve will raise interest rates by June.

In September, Fed policymakers said the central bank would keep interest rates low for a “considerable time” and worried that slowing global growth and a stronger dollar posed risks to the U.S. economy.

Later in October, as the Federal Open Market Committee confirmed that it would not extend its quantitative easing policies, the group noted improved conditions in the labor market that suggested the “underutilization of labor resources is gradually diminishing.”

According to the Labor Department, the U.S. economy added 214,000 jobs in October, and the unemployment rate fell to a six-year low at 5.8%.

The big question for 2015 will be, as Hurtsellers’ colleague Paul Zemsky, CIO of multi-asset strategies, said, is “how much slack is left in the labor market?”

“That means, how low can the unemployment rate go before wages start rising to the point where the Fed becomes nervous and starts raising rates?” Zemsky said.

As Hurtsellers sees it, “the fact that the income divide exists in the U.S. [and] the fact that we haven’t seen real wage growth” will make it hard for the Fed to defend rising rates to Congress.

And Zemsky agrees, even if wages start to grow.

“How do you sit in front of Congress and say, ‘Gee, we’re raising rates just as the consumer is starting to get a little bit of a break by having their wages go up just a little bit more than inflation,” Zemsky said. “Boy, we’re going to hit the economy with a rate rise today.’”

Zemsky said this wouldn’t seem like good policy.

“It’s going to be a bit of a tightrope that the Fed’s going to have to walk,” he added. “That’s another reason why we think they’re going to be later to raise rates rather than earlier.”

There is also the “risk of moving to soon,” Hurtsellers said.

“Something that is going to be weighing heavily on their minds is the error of being wrong,” she said. Adding, “if you tighten and you were wrong, what do you do? You just take rates back to 0 from 25-50 basis points? What you see here is what other central banks have done, even the eurozone, post-financial crisis.”

The FOMC doesn’t want to repeat the policy mistakes made by the four central banks of the euro area, Sweden, Norway and Australia. These are all central banks, Hurtsellers said, “that have tried to tighten financial conditions and have failed. “

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