Of course there is a chance Greenspan will decide not to raise the Federal Funds Rate. Let me get the suspense out of the way quickly, however, by stating my own view that the FOMC will increase the funds rate at this meeting, by 25 basis points. I personally think a 50 basis-point hike would be even better, but the chance of that outcome is very, very slim. Yesterday's close in the July fed funds futures contract has it right, I think.
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FEDERAL FUNDS FUTURES -- 06/28 VS. 05/03*
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06/28 05/03 BP Scheduled
Contract Close Close* Chg. FOMC Meetings
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June '04 1.02% 1.03% -1 June 29-30
July '04 1.28% 1.11% 17 No Meeting
Aug. '04 1.51% 1.27% 24 Aug. 10
Sep. '04 1.72% 1.39% 33 Sep. 21
Oct. '04 1.90% 1.51% 39 No Meeting
Nov. '04 2.10% 1.68% 42 Nov. 10
Dec. '04 2.30% 1.83% 47 Dec. 14
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Jan. '05 2.40% 1.94% 46 No Meeting
Feb. '05 2.62% -- -- Feb. 1-2
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*Day before May FOMC meeting.
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The above run priced in roughly another half point in increases before the election, 25 basis points in August, another quarter point in September. But Greenspan is surely the most political Fed chairman in my lifetime -- most likely ever -- so we'll see. This is one reason the Fed would be better off raising the funds rate by a half percent tomorrow, since it would buy Mr. G. greater political flexibility as the summer progresses.
And as some folks have noted, when I discuss Fed policy, I do so far, far more in terms of Alan Greenspan, not the Federal Open Market Committee. And I have done this for a long time now, since I think it has been a long time since decisions were rendered by a committee functioning with any real independence from Greenspan's dominance.
Which gets me to a small excerpt from an excellent piece written by Michael S. Derby for Dow Jones Newswires, appearing yesterday. The entire article is well worth reading:
"The FOMC has long been known for both its desire to put forward a united front in its decisions and for the very strong hand with which the body is led by Greenspan. But its decisions are supposed to be based on the collective judgment of its voting membership, and for some, Greenspan's FOMC stewardship is too strong."
As always, the post-meeting statement the FOMC will release tomorrow around 2:15 PM (ET) will be critical, and it is likely to generate some financial-market volatility immediately after it comes out.
Assuming there is a quarter-point hike in the funds rate, to 1.25%, I would expect the communique to make some mention of an increase in inflationary risks in recent months. How can it avoid doing so, given the following numbers and trends?
Consumer Producer Import
Price Index Price Index Prices
Month/ ----------------------------------------
Year Y/Y L3Mos* Y/Y L3Mos* Y/Y L3Mos*
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05/04 3.0% 5.5% 4.9% 8.5% 7.0% 10.9%
04/04 2.3% 3.9% 3.6% 5.3% 4.6% 5.8%
03/04 1.7% 5.9% 1.4% 5.1% 1.1% 11.5%
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*Trailing three-month com-
pound annual rate of change.
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On the other hand, I would look for wording in the statement that attempts to preserve as much flexibility as possible regarding additional rate increases. Greenspan will try exceptionally hard to keep the idea of gradualism in play. To do this, there may be some mention of the negative economic impact of high energy costs, or that high energy prices have created price pressures that might be somewhat short-lived in their additional impact, considering the recent decline in the price of crude oil. (As an aside, it's my own feeling that the decline in the price of a barrel of West Texas intermediate crude is about over.)
In other words, I envision a prototypical "weasel document" coming out of the FOMC tomorrow, something steeped heavily in consummate Greenspeak.
I'll get something out tomorrow after we are treated to whatever it is to which we are treated. In the meantime, here's what the Treasury curve looked like as of late yesterday, measured against the cyclical low in yields occurring on 6/13/03, as well against year-end 2003 levels.
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TREASURY YIELD CURVE AS OF 06/28/04
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90-Day 2-Yr. 5-Yr. 10-Yr. 30-Yr.
Date Bill* Note Note Note Bond
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06/28/04 1.35% 2.86% 3.96% 4.74% 5.41%
12/31/03 0.92% 1.82% 3.25% 4.25% 5.07%
06/13/03 0.84% 1.07% 2.03% 3.11% 4.17%
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BASIS-POINT CHANGE TO 06/28/04 FROM:
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12/31/03 +43 +104 +71 +49 +34
06/13/03 +51 +179 +193 +163 +124
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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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06/28/04 +151 +110 +78 +67 +406
12/31/03 +90 +143 +100 +82 +415
06/13/03 +23 +96 +108 +106 +333
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