Fed Watch: Expect Another 1/4 Point Hike
A: All eyes are on Ben Bernanke & Co. as the fed finishes its 2-day meeting today with their final say on monetary policy. Expect a 1/4 point rate hike as the fed continues to view the data and the lagging effects of 16 consecutive 1/4 point rate hikes over the past 2 1/3 years going into today.
Bernanke must show the tradable markets that he is in control and being aggressive in the fight against inflation. The biggest thing to look for in today's 2:15PM EDT decision on interest rates is NOT whether he will raise, we know he will, but the issued statement that goes along with the rate move. I would expect more of the same with a 'data-dependent' fed leaving the door open for another 1/4 point interest rate hike in August.
Today's 1/4 move will bring the fed funds rate to 5.25% and will mark the 17th consecutive rate hike since Alan Greenspan started back in 2004.
For all you newbies to UrbanDigs, the fed controls the fed funds rate to control price stability and guard against inflation creeping into the US Economy. As the fed raises rates, lending becomes more expensive directly affecting the minimum monthly payments that debt holders have to pay on mortgages, ARM's, HELOC's, credit cards and other rate sensitive debt. In short, the fed is trying to slow the economy by tightening credit making it more expensive for people/corporations to take out loans and making it more attractive for people/corporations to invest in fixed asset securities such as CD's. As interest rate's rise, cash becomes more attractive while investments buoyed by 'cheap money' (i.e. housing, new business loans, etc.) become less attractive.
WHAT THE FED WILL DO: Raise 1/4 point to bring fed funds rate to 5.25% and issue an unclear, 'data-dependent' statement bringing undertainty over their next move in AUGUST even though consensus currently calls for a 75% chance of another 1/4 point hike
WHAT THE FED SHOULD DO: Raise 1/2 point, issue a clearer statement that the 2+ year rate hike campaign is now over
There is a growing debate why the fed should raise rates by 1/2 point and get it all over with (including me), but that will not happen. There is also a growing argument that former fed chief Greenspan should have raised rates more aggressively when he first started 2+ years ago, which would have put the results of monetary policy (which are lagging and take about 8-12 months to have an effect) on a faster timetable. This didn't happen so there really isn't much to talk about other than how the fed can learn from past mistakes.
For those of you seeking to buy a home in the near future, be prepared for lending rates to continue to rise and plan accordingly.
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