Will the Fed HIKE rates at the end of January?

Although the credit and bank liquidity crunch continues, there are plenty of signs that the bank liquidity issues are being addressed (e.g., SIV bailouts) and that the real economy is exhibiting significant resilience despite the ongoing subprime mortgage resets. I am sure that there will continue to be ongoing credit anxiety over the next couple of weeks, but I fully expect a significant portion of that anxiety that focuses on liquidity and the health of the banking system will really turn the corner by the middle of January. Given the growing drumbeat of concern about rising inflation, I fully expect that the Federal Reserve will feel enough relief on the bank liquidity and real economy fronts and enough anxiety on the inflation front that the thought of another cut in rates will not even be seriously considered. Rather, a hike in the target rate for fed funds will be the preferred option.

I won't go so far as to suggest that a quarter-point hike at the end of January is a "slam dunk", but it does appear to be a more likely option and I strongly suspect that its likelihood will grow quite quickly as we get near the middle of January.

The Federal Reserve FOMC meets on Tuesday and Wednesday, January 29/30, 2008.

-- Jack Krupansky