Monday, October 09, 2006

Fed will remain paused at 5.25% for the rest of this year and next

My overall assessment of monetary policy remains unchanged.

Market perceptions of Fed policy remain volatile. As of Friday, Fed funds futures contracts indicate a 0% probability of a further rate hike at the October FOMC meeting and only a 2% chance of a cut. Futures indicate a 6% chance of a cut at the December meeting, a 46% chance of a cut by the March meeting, 100% chance of a cut by the June meeting with a 4% chance of a second cut as well, and 36% chance of a second cut by the July meeting. I personally don't concur with those odds, but that is how a lot of people are actually "betting." I would simply note that such betting can change on a moment's notice as economic and financial data unfolds. And, the odds declined somewhat since last week.

My view is that the Fed will keep their fed funds target rate paused at 5.25% for at least the rest of the year, and probably for the entire coming year.

It is also my view that there will not be a recession next year, nor even enough of a growth slump to trigger a Fed rate cut.

-- Jack Krupansky

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