Sunday, October 22, 2006

Status quo at the Fed FOMC meeting: remain paused at 5.25% and the economy continues to cruise along at a modest pace

My overall assessment of Fed monetary policy remains unchanged.

Just about everybody expects the Fed to remain paused at the FOMC meeting on Wednesday, to continue to express mild optimism about the enconomy, and to continue to express guarded concern that inflation still hasn't retreated enough even though they believe that ultimately it will subside.

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 0% chance of a cut at the December meeting and a 4% chance of a hike. Futures indicate only an 8% chance of a cut by the March meeting, a 30% chance of a cut by the June meeting, and a 76% chance of a cut by the August meeting. But there is no longer any hint of a second cut. I personally don't concur with these 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, not to mention commentary and sentiment, unfolds. Further, the "betting" on any last Fed move is usually more of an insurance hedge than an outright bet, more of a "just in case I'm wrong" kind of "bet". Finally, Fed funds futures are not a very reliable indicator more than 45 days into the future.

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 for all of 2007.

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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