Sunday, November 05, 2006

Fed really will remain paused at 5.25% until at least 2008

My overall assessment of Fed monetary policy remains unchanged:

My view is that the Fed will keep the Fed funds target rate paused at 5.25% for 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.

A number of weak and mediocre economic reports early in the week caused a lot of people to believe that the economy was on the verge of calling off a cliff, but a couple semi-decent reports later in the week caused people to backtrack significantly in their commitment to an economic decline.

As of Friday, Fed funds futures contracts indicate a 0% probability of a further rate hike at the December FOMC meeting and a 0% chance of a cut. Futures indicate a 2% chance of a hike at the January meeting, a 16% chance of a cut by the March meeting, a 66% chance of a cut by the June meeting, a 100% chance of a cut by the August meeting and an 8% chance of a second cut, and a 66% chance of a third cut by December 2007. 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.

The bottom line here is that the Fed won't move through January, and any speculation above Fed moves further down the road are simply wild guesses based on contrived stories about a hypothetical future economy.

-- Jack Krupansky


At 4:34 PM EST , Anonymous Joshua Rodd said...

Thanks for keeping your blog updated--it's nice to have some sensible commentary to read.


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