Summary
The Federal Open Market Committee meets tomorrow, and it will almost certainly vote to hike its target rate on federal funds by another 25 basis points, to 2.00%. What policy initiatives might come thereafter?
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It is a virtual certainty that at tomorrow's policy meeting, the Federal Open Market Committee will vote to increase the Federal Funds Rate by 25 basis points, to 2.00%. What is less clear is whether the FOMC will move by another quarter point when it meets in December.
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FEDERAL FUNDS FUTURES -- 11/08 VS. 08/06
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11/08 08/06 BP Scheduled
Contract Close Close Chg. FOMC Meetings
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Nov. '04 1.93% 1.78% 15 Nov. 10
Dec. '04 2.11% 1.89% 22 Dec. 14
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Jan. '05 2.21% 1.94% 27 No Meeting
Feb. '05 2.41% 2.09% 32 Feb. 1-2
Mar. '05 2.48% 2.16% 32 Mar. 22
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In the immediate wake of last Friday's strong employment numbers, many analysts quickly concluded that these data meant the Fed would not "pause" hiking rates in December, as many on Wall Street had thought probable prior to the employment report. But as the above table indicates, the federal funds futures market, at least as of yesterday's close, remained somewhat circumspect about a December rate action.
If the funds rate is raised by 25 basis points tomorrow, the strong probability, it will mark the fourth quarter-point increase this year. After a long series of cuts that commenced at the beginning of 2001, which took the fed funds rate from 6.50% to 1.00%, the FOMC began reversing course at its June 2004 meeting.
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2004 SCHEDULED MEETINGS OF THE FEDERAL OPEN
MARKET COMMITTEE AND POLICY ACTIONS TAKEN
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2004
Thru 9/21 Meeting: 1.75% 2.75%
Opening '04 Levels: 1.00% 2.00%
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Action Taken On
Meeting --------------------------------
Date Fed Funds Rate Discount Rate
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12/14 REGULAR MEETING
11/10 REGULAR MEETING
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October NO SCHEDULED MEETING ------------>
9/21 REGULAR MEETING, Action Taken:
+25BP to 1.75% +25BP to 2.75%
8/10 REGULAR MEETING, Action Taken:
+25BP to 1.50% +25BP to 2.50%
July NO SCHEDULED MEETING ------------>
06/29-30 REGULAR MEETING, Action Taken:
+25BP to 1.25% +25BP to 2.25%
05/04 REGULAR MEETING, No Action Taken
April NO SCHEDULED MEETING ------------>
03/16 REGULAR MEETING, No Action Taken
February NO SCHEDULED MEETING ------------>
01/27-28 REGULAR MEETING, No Action Taken
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In progress recently is something provoking more than a modicum of interest. The strong expectation of higher administered rates in the United States, coupled with the anticipatory increase this already has triggered in open-market rates at the short end of the yield curve, have not prevented a rather noticeable drop in the dollar's exchange-rate value as of late.
But maybe rate considerations have blunted the dollar's decline? If it has accomplished the latter, then the greenback might well be in for even more trouble in the period not far ahead. In turn, this should be additionally beneficial for the price of physical gold, which has behaved very well against the dollar's recent weakness.
Speaking of interest rates within the context of exchange rates, it is interesting to note that government rates in the US at the very short end of the curve remain far below those available in places like Australia and the United Kingdom, and not appreciably above those available in Germany. Thus, the dollar has little or no interest-rate cushion against those countries' respective currencies.
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APPROXIMATE INTEREST RATES OF SELECTED
COUNTRIES' SOVEREIGN DEBT SECURITIES
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Maturity
Date ----------------------------
Country 2004 1-Year 2-Year 5-year 10-year
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Australia 11/08 5.07% 5.13% 5.34% 5.49%
United Kingdom " 4.57% 4.65% 4.73% 4.78%
Germany " 2.30% 2.50% 3.20% 3.90%
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UNITED STATES " 2.44% 2.79% 3.51% 4.21%
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Japan " 0.02% 0.13% 0.68% 1.54%
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Yield Spreads -- Treasuries Vs. Foreign
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Australia 11/05 -263 -234 -183 -128
United Kingdom " -213 -186 -122 -57
Germany " +14 +29 +31 +31
Japan " +242 +266 +283 +267
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THE US DOLLAR'S EXCHANGE-RATE PERFORMANCE
AGAINST CURRENCIES OF ABOVE COUNTRIES
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% Change
To 11/05 From
Country/ 11/08 09/30 12/31 -------------
Currency 2004 2004 2003 09/30 12/31
Close Close Close 2004 2002
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Australia Dol. 1.3202 1.3738 1.3282 -3.9 -0.6
UK Pound 0.5389 0.5518 0.5599 -2.3 -3.8
Germany (Euro) 0.7741 0.8041 0.7950 -3.7 -2.6
Japanese Yen 105.53 110.01 107.37 -4.1 -1.7
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FRB $ Index 84.11 87.36 86.92 -3.7 -3.2
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Over the last several months, the Federal Reserve has become increasingly aggressive in its acquisition of open-market government securities, primarily, Treasury obligations.
In early June, the Fed's holdings totaled approximately $681.5 billion, which was up 30.3 billion or 4.6% from a year earlier. During the Federal Reserve's most recent statement week, ended 11/3, total holdings of governments had risen to more than $707 billion. This was up $48.2 billion or 7.3%, year over year, and represented a healthy increase of $25.6 billion from early June.
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FEDERAL RESERVE HOLDINGS OF
U.S. GOVERNMENT SECURITIES
(Billions of Dollars)
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Fed. Reserve US Government Year/
Statement Securities Year Year
Week Ended Held Outright* Earlier Change
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2004
11/03 707.023 658.813 7.3%
10/06 700.691 656.242 6.8%
09/01 694.851 653.880 6.3%
08/04 693.728 652.996 6.2%
07/07 687.668 652.443 5.4%
06/02 681.468 651.202 4.6%
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03/31 674.037 641.311 5.1%
01/01 666.402 629.415 5.9%
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*Average of daily figures.
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