Fed Holds Rates Steady: Language Changes
A: No change to fed funds rate. However, a change in the statement is a shift from the downside risk to growth TO the upside risk of inflation. This will be a data dependent fed, with rates on hold for now! The 'Tough Guy Act' is on!
One dissenting vote from Richard Fisher who wanted to hike by 1/4 point at this meeting. Upside risk to inflation is the key tough guy element of the statement!
Personally, I think the fed is in transition mode as it PREPARES US FOR RATE HIKE's down the road. No doubt about it. It's just about when they start the campaign, and that will come the moment economic data shows a bit more signs of stability; probably in the labor market! As long as unemployment is rising, the rate hike campaign will be on hold. A big wild card is inflation expectations that is clearly rising.
While the credit crisis is not over, we do have 325 basis points of easing, fiscal stimulus and fed targeted liquidity injections to fully kick in in our future! So, don't be shocked with more bad news but know that measures taken are lagging in nature and the time when it will start funneling through the economic system is in sight.
Remember when the fed cut rates and used the 'to forestall adverse economic effects' phrase? Well, we all know economic data is weak and likely to weaken, but how will past moves put a floor to how bad it would have got? Think along those lines.
Comments (7)
I think the comment the fed made regarding inflation "moderating later in the year" undermined the "tough guy" act. Fed fund futures reflect that after today's announcement they see an increase in rates as less likely (although not by much). I think the fed will be challenged to raise rates and will not be able to until real signs of recovery are evident (at least a few months).
Posted by Andrew Fine | June 25, 2008 4:12 PM
yea, it def made the report fell less hawkish than what some were looking for! I have to agree with what you are saying, unless core inflation really surges big time in which case he may have to throw a few hikes out there.
Posted by Noah | June 25, 2008 4:29 PM
Have you sen the ABX's or the CMBX's recently? ABX at all time low and the CMBX spreads are at record highs. No tightening coming. This market is showing clear signs of impending Pain. Watch the next few weeks. It could get ugly.
Posted by Mike | June 25, 2008 9:38 PM
After today's action (-355 on Dow), makes you wish that the fed was more hawkish, in words, at least. The market followed oil, which followed the dollar, which followed the less than hawkish comments.
Posted by Andrew Fine | June 26, 2008 4:14 PM
Hey Andrew! Yea, but you know, what if things end up being way worse than we originally thought? Im hearing potential cut in discount window as an act the fed can do to help banking sector.
Oil, who the hell knows. Lots of talk, but in the end, the best cure for high prices is the high prices. We'll just have to wait this out, make smarter policy decisions going forward, and wait for the currency element to help turn this asset arond. We might have to wait a while longer. Its one of the few assets working right now.
Posted by Noah | June 26, 2008 8:16 PM
As I said yesterday, the ABX and CMBX's are telling the story. We have not even seen close to the worst of it. There was no fear at all today. Nothing more than an orderly selloff. There is so much more bad level 3 assets out there we'll probably never know the extent.
Posted by Mike | June 26, 2008 8:34 PM
yep Mike your spot on, credit markets eroding again could lead to another event.
However, for what its worth, the fact that we broker support, to me, starts some level of fear
Posted by Noah | June 27, 2008 8:24 AM