What will the Fed do?

I have written before about how some of the key inputs to the FOMC decision-making process are the behind the scenes personal conversations that Fed officials have with banking and business leaders in the final days before the FOMC meeting. Dallas Federal Reserve Bank president Richard Fisher explicitly mentioned that process in his recent speech entitled Challenges for Monetary Policy in a Globalized Economy before the Global Interdependence Center in Philadelphia:

In the course of preparing for each FOMC meeting, I regularly consult directly with some 30-plus CEOs to develop a sense of future business activity, including cost and pricing developments. I have found this rigorous exercise to be extremely helpful in placing our staff's econometric analysis in context as I have prepared for FOMC meetings in the past, and I will be listening especially carefully to these business operators' reports on inflation-related developments as I prepare for upcoming FOMC meetings.

The media never refers to this key element of FOMC preparation. But it is a key process that helps to assure that the FOMC participants are as up to speed on the real economy as is humanly possible.

As far as the coming FOMC meeting, I will continue to note that Fed funds futures prices are usually a fairly reliable indicator within 45 days of an FOMC meeting. As of the close on Friday, February fed funds futures (at 96.43) were indicating a 100% chance of a half-point cut plus a 72% chance of an additional quarter-point cut. Part of this betting is that some people believe that the Fed may be forced to cut before the FOMC meeting as well as at the meeting. Either way, a lot of people are expecting that the Fed will cut its target rate by 0.75% once the FOMC meeting completes. A 0.50% cut at the meeting now appears to be a "slam-dunk", but the additional quarter-point to still a bit speculative. Some of this may depend on how certain $150 billion of fiscal stimulus becomes before the FOMC meeting.

Please note that changes to the fed funds target rate impact the real economy with a significant lag, on the order of months to a year or more, so it would be incorrect to presume that any recent economic weakness was an indication that Fed monetary policy was not working. Actually, mortgage applications were up sharply again last week, so there is at least some evidence that there has been some positive effect to date.

-- Jack Krupansky