Interest Rate Roundup

Wednesday, June 25, 2008

Fed keeps rates on hold, plus thoughts on the post-meeting statement

Here's the statement. First read: Seems "not hawkish enough" to me. We'll see ...

"The Federal Open Market Committee decided today to keep its target for the federal funds rate at 2 percent.

"Recent information indicates that overall economic activity continues to expand, partly reflecting some firming in household spending. However, labor markets have softened further and financial markets remain under considerable stress. Tight credit conditions, the ongoing housing contraction, and the rise in energy prices are likely to weigh on economic growth over the next few quarters.

"The Committee expects inflation to moderate later this year and next year. However, in light of the continued increases in the prices of energy and some other commodities and the elevated state of some indicators of inflation expectations, uncertainty about the inflation outlook remains high.

"The substantial easing of monetary policy to date, combined with ongoing measures to foster market liquidity, should help to promote moderate growth over time. Although downside risks to growth remain, they appear to have diminished somewhat, and the upside risks to inflation and inflation expectations have increased. The Committee will continue to monitor economic and financial developments and will act as needed to promote sustainable economic growth and price stability.

"Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Donald L. Kohn; Randall S. Kroszner; Frederic S. Mishkin; Sandra Pianalto; Charles I. Plosser; Gary H. Stern; and Kevin M. Warsh. Voting against was Richard W. Fisher, who preferred an increase in the target for the federal funds rate at this meeting."

UPDATE: What's the early market reaction? Lots of fluctuations, that's what. Dollar popped, then reversed. Crude oil is rallying off its lows. Bond futures are down a few ticks post-Fed. Stocks are up, but not huge. Two-year yields essentially where they were pre-Fed (up about 6 bps).

UPDATE2: Here are some more of my thoughts on the Fed's statement ...

“My sense is that the Fed wasn’t hawkish enough. Officials talked quite a bit about elevated inflation. But they didn’t appear to shift fully to a “tightening bias.” Indeed, the Fed looks like it’s continuing to try to thread the needle. It doesn’t want to raise rates because doing so could exacerbate the housing downturn and the economic slump. But with several inflation gauges at or near multi-year highs, the Fed is playing a dangerous game.

"Put simply: Talking the talk on inflation is one thing. Walking the walk is another. By keeping real interest rates deeply in negative territory, and failing to follow the lead of several foreign central banks, which ARE raising rates, the Fed could weaken the dollar further and “accommodate” these high commodity prices. That, in turn, could ultimately result in an even-worse inflation problem down the road."


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