The Federal Reserve is heading into this week's pivotal interest rate-setting meeting with financial markets and Wall Street analysts deeply split over whether it will tighten monetary policy following weeks of mixed signals from the central bank.
Conflicting messages from a divided body of Fed officials mean futures traders are betting against the possibility of a rate increase, while nearly half of economists surveyed by Bloomberg expect the Fed to pull the trigger next week. Other analysts think the US central bank could hold steady until 2016.
The uncertainty presents Fed chair Janet Yellen with a leadership test as she presides over a hugely contentious decision on Thursday, amid clashing data and heavy lobbying from across the globe.
If the Fed skips a September rise, it would extend a destabilising period of uncertainty over the Fed's intentions. It would also create a big communications challenge for Ms Yellen, who has personally been advocating a rate increase in 2015 and would need to convince traders the Fed still means business about lifting rates.
However, the Fed's failure to clearly lay the groundwork for a move on September 17 means that if the Fed defies investors and lifts rates, there is a risk of a sharp reaction after a period of high volatility, investors said.
Some fret that a premature rate rise could imperil the US recovery. "We're at a delicate point," said Anne Richards, the investment chief of Aberdeen Asset Management. "I used to think that we'd be fine [if the Fed lifted interest rates] but I'm starting to worry about what a rate rise will do to the US economy."
Divisions over whether the Fed will act were clear last week, with some analysts complaining about unclear communications.
The futures market put odds of just 28 per cent on an imminent hike — even after Stanley Fischer, the Fed's vice-chairman, indicated in late August that a rate increase was on the table for the September meeting. The two-year Treasury yield hit a four-year high of 0.76 per cent, suggesting some investors believe a hike may yet be on the horizon.
The situation contrasts with the run-up to the last two periods of rising US interest rates. The Fed's first rate increase in 2004 was almost completely priced in two weeks ahead of its meeting, as it was in 1999, according to George Goncalves, head of US rates strategy at Nomura.
Torsten Sløk, chief international economist at Deutsche Bank, said he was picking up "frustration and confusion" among investors. He argued that a decision by Ms Yellen not to speak at the Kansas City Fed meetings at Jackson Hole, Wyoming last month — traditionally a key moment for Fed communications each year — had "left a vacuum where markets are left to interpret things on their own . . . and that creates volatility."
Earlier this year Fed communications led many analysts to pencil in a June hike, but the dollar's surge prompted officials to back away. Then in July Ms Yellen made the case to Congress for the central bank to act early, arguing this would permit a gradual series of subsequent increases.
However, Fed policymakers emerged from their Jackson Hole meetings at odds over the right moment to start lifting rates from near-zero levels given volatility in financial markets and concerns over China's economy.
Falling commodity prices and inflation expectations, and the rise in the dollar were all given as possible reasons for the Fed to sit tight. Futures traders put a 41 per cent chance of no move at all this year.
Hanging over the Fed's discussions is lobbying from around the world on how it should set policy. Global institutions including the International Monetary Fund and World Bank are urging it to hold fire given the possible risks. However, Agustín Carstens, Mexico's top central banker, said last month that a Fed rate rise indicating a stronger US economy would be "for us, very good news".
Nicholas Gartside, a senior fund manager at JPMorgan Asset Management, said he expected the Fed to lift rates in September, but predicted that policymakers would stress they will only tighten further with extreme caution, and perhaps lower their forecasts for future rate increases.
"There's the hike and then there's the messaging, and the messaging is the more important part," he said.
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