Fed Says Steady As She Goes…
Kurt Brouwer June 25th, 2008
No Change In Rates…But For How Long? (Wall Street Journal - MarketBeat Blog, June 25, 2008, David Gaffen)
The committee elected to leave the federal-funds target rate unchanged at 2%, which was largely expected. What is up for grabs is whether the Fed will raise rates in the near-future, as the market seems to expect, or remain on hold, which appears to be the opinion of most economists.
“Today’s pause — it remains unclear whether it’s a temporary break or the first step along a tightening path — strikes a tenuous balance between the wounded consumer and the specter of commodity-driven inflation,” writes Guy Lebas, Janney Montgomery fixed income strategist.
The expectation was that the committee would speak more hawkishly on inflation, and in the last few weeks market participants have priced in aggressive expectations from the Fed, a more activist response than most believe the Fed will take. That’s been reconsidered in the wake of this statement.
“The Committee expects inflation to moderate later this year and next year,” they wrote, a slight change from their previous expectation for inflation to moderate “in coming quarters.” They added, however, that “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.”…
We expect higher short-term interest rates, but not until late this year or early in 2009. In a recent post (see How Far Has the Dollar Fallen? And Why? — What’s Next?), we wrote:
The Fed’s current posture is that we should not expect any additional cuts to the Fed Funds rate. And, in all likelihood, we will see higher Fed Funds rates late this year or early next year as the economy begins to pick up steam. As a result, the dollar has shown a little strength lately. So the dollar should stabilize roughly around this level or a bit higher for a while and then we should see some strengthening when interest rates begin moving up…
See also Dollar Rallies — Three-Month High vs. Euro.
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