First, it was for a "considerable period." This segued into "patient." These hand-is-quicker-than-the-eye maneuvers regarding monetary policy are no longer acceptable, so the fun part of today's Federal Open Market Committee meeting will be to see how the committee (really Greenspan) handles the post-meeting statement, due out around 2:15 PM (ET).
The federal funds futures market provides an excellent example of how expectations have changed since the FOMC last met, to wit:
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FEDERAL FUNDS FUTURES -- 05/03 VS. 03/15*
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05/03 03/15 BP Scheduled
Contract Close Close* Chg. FOMC Meetings
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May '04 1.02% 1.01% 1 May 4
June '04 1.03% 1.01% 2 June 29-30
July '04 1.11% 1.04% 7 No Meeting
Aug. '04 1.27% 1.07% 20 Aug. 10
Sep. '04 1.39% 1.10% 29 Sep. 21
Oct. '04 1.51% 1.15% 36 No Meeting
Nov. '04 1.68% 1.23% 45 Nov. 10
Dec. '04 1.83% 1.32% 51 Dec. 14
Jan. '05 1.94% -- -- NA
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*Day before last FOMC meeting
(no meeting held in April).
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And we definitely should not leave the bond-market "vigilantes" out of the equation, either. Here's what has taken place across the Treasury curve since just before the FOMC's March meeting (held on 3/16) through last Friday's close. The table breaks out the year to date as well.
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TREASURY YIELD CURVE AS OF 04/30/04
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90-Day 2-Yr. 5-Yr. 10-Yr. 30-Yr.
Date Bill* Note Note Note Bond
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04/30/04 0.97% 2.30% 3.61% 4.50% 5.28%
03/12/04 0.93% 1.51% 2.72% 3.76% 4.71%
12/31/03 0.92% 1.82% 3.25% 4.25% 5.07%
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BASIS-POINT CHANGE TO 04/30/04 FROM:
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03/12/04 +4 +79 +89 +74 +57
12/31/03 +5 +48 +36 +25 +21
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YIELD-SPREAD DIFFERENTIALS (Basis Points)
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90D-> 02Y-> 05Y-> 10Y-> 90D->
02Y 05Y 10Y 30Y 30Y
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04/30/04 +133 +131 +89 +78 +431
03/12/04 +58 +121 +104 +95 +378
12/31/03 +90 +143 +100 +82 +415
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*Coupon-equivalent yield.
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From an expectations perspective and using open-market proxies as the benchmark, the Federal Reserve is clearly behind the curve, although I'm certain the Fed does not see it this way. Potentially, this makes the situation more dangerous, since it leaves the central bank prone to additional tardiness in getting on with the mission. You can be sure political considerations are also on the minds of some of these folks, Greenspan in particular.
Nevertheless, I believe the FOMC will probably appreciate that being too clever with today's pronouncements will inflame open-market interest rates even more, at the longer end of the curve in particular. So I expect language that makes it clear (or as clear as Greenspan gets) that the first increase in years in the Federal Funds Rate is on the way. And if the FOMC were listening to me, it would make clear the hike was coming sooner than later -- at the June meeting (scheduled for 6/29-30).
If this is what we get today, an indication that a rate increase could be a June event, I suspect longer-dated Treasuries will react reasonably well. However, if the statement is too cute as in too equivocal, there's a significant danger of a materially less favorable market reaction. And since interest-rate movements have become increasingly dominant recently in influencing stock prices, a bad reaction in the bond market to the FOMC's wording will likely spill over into the stock market.
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