Saturday, November 18, 2006

Might the Fed hike in the Spring?

For the past few days I have been ruminating on the idea that the Federal Reserve may actually feel the need to hike the Fed funds target interest rate in the Spring to further tamp down persistently lingering inflationary pressures. In particular, although crude oil and gasoline have been relatively well-behaved over the past two months, they are both still at a rather high absolute level that continues to seep through to higher prices in the rest of the economy, not to mention lackluster productivity-producing investment due to those high energy expenses.

The economic dampening of the weakness in the housing sector is not likely to be a long-term issue, and lower interest rates would not further the Fed's intentions of bringing housing back into being a moderate portion of the economy rather than a source of inflationary pressure.

My tentative conclusion is that the Fed will likely hike to 5.50% at the March 20/21 or the May 9 meeting. I don't anticipate additional hikes, but see this as more of an insurance move since the economy is still quite strong and a "shot across the bow" of speculators who are behaving a little too wildly with easy money.

Please note that even 5.50% is not a true restrictive interest rate, but merely near the upper end of the neutral range. The point is that even at 5.25%, money is relatively cheap and in fact too cheap to dampen the wild and frenetic enthusiasm of speculators.

I have not yet formed a firm, final opinion on this, but I may soon do so.

-- Jack Krupansky


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