Fed is Behind The Curve on U.S.Economy, HSBC Banker Says

        By James Glynn
        The U.S. Federal Reserve will face a "credibility moment" in coming months as the U.S. economic recovery gathers momentum, suggesting the central bank has been too cautious in its outlook, HSBC's global chief investment officer for fixed income said.
        In an interview Wednesday with The Wall Street Journal, Xavier Baraton said the U.S. economy is recovering more quickly than the dovish Fed is currently indicating.
        "The Fed is a bit behind the curve compared to how the U.S. economy is accelerating," Mr. Baraton said. "It is more a credibility moment that the Fed may have in the second half of the year. Their prudent-or-dovish stance will be more contradicted by the data."
        Mr. Baraton forecast that the 10-year U.S. Treasury yield --which lately has been plumbing seven-month lows around 2.50% -- will rise to 3.25% by year-end.
        "In the second half of the year the U.S. economy will accelerate, and that will be much more visible to the point that, to stay credible, the Fed will have to be much more explicit about future rate hikes," Mr. Baraton said.
        Recent Fed guidance suggests rates will remain low for longer, even as inflation and employment rise -- though they're in the midst of determining just how to raise interest rates when the time comes, as their former methods increasingly seem outdated.
        Recent U.S. data have been mixed, but key areas of the economy like job creation and consumer lending are improving, Mr. Baraton said.
        The 10-year Treasury yield has tumbled from about 3% at the start of the year, a surprise to investors and strategists who expected yields to build on last year's rise.
        Investors have piled into bonds as they fret about soft growth in the euro zone, the slow U.S. recovery and waning momentum in China. Tensions in Ukraine and reassurances from major central banks that they're in no rush to raise interest rates has also bolstered bond prices and sent yields lower.
        Mr. Baraton's comments follow remarks overnight from Federal Reserve Bank of New York President William Dudley suggesting that the Fed will move slowly in raising the Fed funds rate.
        "We currently anticipate that a considerable period of time will elapse between the end of asset purchases and lift-off," Dudley said.
        Mr. Baraton said he sees evidence that business and consumer lending are gathering momentum. Inflation is not a major threat but is likely to rise soon to 2% on-year or higher, up from 1%-1.5% recently, he said.
        The market may be mistaken in anticipating that the Fed will remain cautious in coming years, Mr. Baraton said.
        "The market is translating this (dovish) consciousness over the next four to five years, which does not make complete sense to us," he said. "A year from now the unemployment rate will be lower, quality job growth will be even more visible, wage growth will be higher and inflation will be higher," Mr. Baraton said.
        (END) Dow Jones Newswires

        May 21, 2014 03:45 ET (07:45 GMT)