Summary
I see no reason the Federal Open Market Committee will deviate from what it is expected to do tomorrow, which is to raise its target on the Federal Funds Rate by 25 basis points, to 2.25%.
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What the Federal Open Market Committee should do at tomorrow's policy meeting, versus what it will do, do not necessarily represent the same outcome.
There are those who think that in light of the dollar's recent slide, the FOMC will hike the Federal Funds Rate by a half point. In fact, some believe that Friday's dollar strength was the result of this perception.
Such an action, a 50 basis-point increase, is probably a pretty good idea. However, I don't think it will be what is forthcoming. This is 100% Greenspan's Fed, where you give the markets as much advance notice as possible of the course of monetary policy. The last "official" pronouncement we have to work with in this regard is the post-meeting statement issued after the FOMC's November meeting. Here's the critical part of that communique:
"The Committee perceives the upside and downside risks to the attainment of both sustainable growth and price stability for the next few quarters to be roughly equal. With underlying inflation expected to be relatively low, the Committee believes that policy accommodation can be removed at a pace that is likely to be measured. Nonetheless, the Committee will respond to changes in economic prospects as needed to fulfill its obligation to maintain price stability."
The above text, highly similar to what the Fed has published well before it began hiking rates in late June, continued to propound "gradualism," the catch word in this regard being "measured."
Friday's close in federal funds futures made no allowance at all for a 50 basis-point increase in the funds rate. In addition, it is all but certain the stock market would really dislike such a surprise. And everyone knows how Mr. G. feels about the stock market. He hasn't become known as "Uncle Al, Wall Street's pal" for nothing!
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FEDERAL FUNDS FUTURES
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12/10 Scheduled
Contract Close FOMC Meetings
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Dec. '04 2.14% Dec. 14
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Jan. '05 2.25% No Meeting
Feb. '05 2.47% Feb. 1-2
Mar. '05 2.54% Mar. 22
Apr. '05 2.65% No Meeting
May '05 2.80% May 3
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So while I think the small number of analysts who are looking for no increase tomorrow will be wrong, I suspect those who are expecting a half-point hike will also be incorrect.
The markets -- initially, at least -- will key off the statement the FOMC issues around 2:15 PM (ET) tomorrow. Of significant interest here is how Mr. Greenspan and associates continue to downplay the inflationary pressures that continue to build. But one thing you can pretty much bet on -- they will downplay them!
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2004 SCHEDULED MEETINGS OF THE FEDERAL
OPEN MARKET COMMITTEE AND POLICY ACTIONS TAKEN
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Fed Funds Rate Discount Rate
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2004
Thru 11/10 Meeting: 2.00% 3.00%
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, Action Taken:
+25BP to 2.00% +25BP to 3.00%
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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