It is hard to believe that there is not an active discussion on what the Federal Open Market Committee (FOMC) will do at upcoming meetings.
Seeing the enormous impact and power that rates set by the FOMC have, it would be interesting to hear FW members views' on what is going to happen.
Let's refer to them as the FOMC instead of the "Fed" since the FOMC consists of twelve voting members: the seven members of the Federal Reserve Board and five of the twelve Federal Reserve Bank presidents. http://en.wikipedia.org/wiki/FOMC
A lot of traders and exchanges are putting the odds that the FOMC will pause next week. Most notably, Bill Gross of PIMCO fame. There is a nice contrarian view here, though it was posted (8/2/06) before the latest unemployment numbers (8/4/06)
Based on the job report today and how the eur/usd moved I expect a rate pause on tuesday. It seems that the economy is indeed slowing down, and there is no reason not to pause for a moment and take an extended look for the FOMC.
Bernanke could go for another rate increase to establish himself as a tough inflation fighter. Also, all the inflation numbers are still higher than the FOMC likes. If this happened, I think the markets would be ecstatic because the FOMC has to take a break now or at the next meeting.
If they don't raise the rate now, the markets will be unclear as to what will happen next meeting. But, if they do raise the rates, they will be drawn and quartered in the press. Tough choice.
In my mind Bernanke has no idea where the US economy is at. I don't believe anybody does. Has inflation been stifled for now with an obvious slowing economy or is stagflation starting to rear its ugly head?
That jobs number was horrible. 100k new jobs is the bare minimum to keep the economy going so watch that jobs number in coming months. We also have to remember the effects of interest rate hikes lag the current data. Most people believe 4.00-4.25% is probably the neutral rate so we are well ahead of that. Im thinking the FOMC has gone too far with their hikes already.
But this problem all goes back to "bubbles" Greenspan. We "cheated" our way out of this last recession with ultra low artificial rates and as a result mutliple bubble markets have been born. Someday pain must be felt somewhere for the economy to right itself again. You don't get something for nothing. The US dollar could help rememdy this with another big downleg but the asian countries won't let this happen.
So what do we have left? A national economy heavily manipulated by the FOMC and foreign central banks. Are they stronger than natural market forces? History tells us the market always wins handily against artificial intervention at some stage.
My biggest concern is the negative US savings rate for 15 straight months and current government spending. It really is terrifically unsustainable in the medium term. The US consumer must keep spending but how much more debt can be piled on before reality hits? If inflation isn't squelched can the FOMC keep raising rates without crippling the US consumer and bursting the housing bubble?
Yeah Bernanke inherited a doozy alright. Normally the FOMC would be happy to risk a recession against inflation but this time it might be much worse than a recession if they get it wrong.
OP, there actually has been a semi-active discussion about FOMC policy as part of the T-bill thread, since the short term Treasuries are very sensitive to expected rate changes.
I usually observe the Fed Funds futures contracts. They are a good guide but of course no guarantee. Here are some links:
All predicitions on what the FOMC will do in August have been very volatile recently. I've seen almost daily swings on what people think will happen. A few days ago I've heard the unexpectedly high PCE (inflation) will seal the deal for another rate hike, then even more recently the unexpectedly slowing jobs growrth was supposed to cause a pause. I don't think anyone really knows at this point, including the FOMC itself. One thing that I have learned is not to listen to predictions of any experts or analysts - they change their mind every day based on new data. That said, an analyst for Deloitte has suggested on CNBC's Worldwide Exchange a few nights ago that the Fed will raise in August, and will begin lowering early in 2007 and arrive at 3.5% eventually. Interesting theory but I'm sure it's just speculation. However, feds funds futures are heading in the direction of lower rates for the January 07 to July 07 contracts.
asharerin said:So what do we have left? A national economy heavily manipulated by the FOMC and foreign central banks. Are they stronger than natural market forces? History tells us the market always wins handily against artificial intervention at some stage.
What makes you believe that FOMC policy has no control over the economy? Isn't it hard to fight the guy that controls your cost of doing business?
OP, since the this thread has been a little "under the radar" so far, may I suggest you add something about "Fed" or "Ben Bernanke" etc. to the title? It's quite possible that many people have no idea what the FOMC is but know the term "Fed" very well. (and they may be searching for threads containing "Fed" rather than "FOMC"). No doubt there are more people interested in this topic than the ones that have posted so far.
Look, rates are very low. Very low! 5.25% fed rates historically are very low. economy is doing just well enough. everything is getting expensive(inflation). i hope to see the rates - fed funds at 8% in the coming future.
yes no one sees that know. but u will see in the coming yeaRS
Melody0 said:Look, rates are very low. Very low! 5.25% fed rates historically are very low. economy is doing just well enough. everything is getting expensive(inflation). i hope to see the rates - fed funds at 8% in the coming future. This is far above what the FOMC views as neutral, neither advancing or hindering the economy. I think most economists view neutral territory somwhere around 4%, +/- 0.5%.
If they raise the rates to 8% that means they are doing some serious inflation fighting. There is no indication that this would need to be done in the coming years.
Melody0 said:Look, rates are very low. Very low! 5.25% fed rates historically are very low. economy is doing just well enough. everything is getting expensive(inflation). i hope to see the rates - fed funds at 8% in the coming future.
yes no one sees that know. but u will see in the coming yeaRS
But I think that's precisely the reason that rates are low - the economy is just doing well enough, not a 90's style explosive economy; so raising rates further, which discourages spending, and presumably slows the economy, would not be very effective. But if the economy is not the cause for high inflation, then there must be other (uncontrolled?) factors causing inflation - how to deal with them and how does tightening monetary policy affect them?
Buddy of mine does an interesting analysis of the Treasury curve, given that Treasuries are zero-risk and therefore should provide an implicit forecast of implied future borrowing rates, based on expectation of an efficient market that eliminates arbitrage.
(Basically Treasury rates should reflect expected borrowing costs over their term, so given that the Fed rate is higher now than the curve, there is an expectation that rates should float lower within the horizon of the T-Bill/T-Note's term)
He proceeds to run out the analysis to find what combinations of hikes / future cuts would generate the current Treasury curve, with interesting results. Even with an expected pause, current curve implies at least 3 cuts within the next 2 years.
Certainly a different spin on the age-old question of trying to figure out how interest rates work.
One can argue whether political / geo-political considerations might not be fully priced into the Treasury curve, but there's enough debt trading that the market can be considered to reflect much, if not all of the current economic information available. What is left is market psychology, which may or may not be correctly captured by analyses such as my buddy's, above.
I'm still thinking that there's going to be another rate hike on tuesday. Why? There's been signs of economic slowdown, but not inflation slowdown. So, despite the fact that inflation lags economic activity, I think the Fed will need to keep a hawkish tilt to keep the threat low. Because, during my inglorius career as an econ major, I decided that, since the 70's, if the Fed ever has to choose between fighting inflation and economic growth, they're going to fight inflation.
If that's the case, it would mean the analysis at accruedinterest (which was nifty, btw) is demonstrating that market psychology is slightly askew.
It has some graphs showing how far fed funds futures were off from the actual target rates set at FOMC meetings 90, 60, and 30 days ahead. It shows that (Fig.3), with improved communications over the years, markets have predicted FOMC policy with an average of better than 5 basis points in the days just before the meeting. (interestingly it looks like their average prediction was no better 30 days out than the day just prior to the meeting - maybe a sign that looking at too recent data is irrelevant?)
It also shows (Fig. 1) that markets have historically overpredicted the end of a tightening campaign 90 days out - which would not be consistent in this case - August FF futures predicted we'd be below 5.25% right now, 3 months ago.
The last graph of Fig. 4 indicates that FF futures before a meeting are seldomly way off from the rate decision (looks like 5-10 bps), although a couple times they have been off 25, 50 or more bps. So looks like if the market gets it wrong, it gets it really wrong. Tomorrow might be a candidate to get it really wrong or really right. It'll be interesting ...
For everyone's information, fed funds futures right now are at 94.705, implying a 5.295% average rate for August, which translates into a 24% chance of a rate hike. This is slightly up from recent days...
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