Summary
Look for another 25 basis-point increase in the Federal Funds Rate to come out of this week's meeting of the Federal Open Market Committee.
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Weak economic data or a "better-than-expected" inflation number (generally, is there any other kind?) quickly evoke a response from some quarters of "no Fed rate hike." However, under certain circumstances, no increase in rates can be more problematic than having one. Greenspan has created such an environment.
Therefore, look with a very high degree of probability for another quarter-point increase in the target rate on federal funds, to 2.50%, to come out of this week's Tuesday-Wednesday meeting of the FOMC. As the following table indicates, the fed funds futures market has placed a 100% bet on such an outcome.
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FEDERAL FUNDS FUTURES
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01/28 Scheduled
Contract Close FOMC Meetings
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Feb. '05 2.50% Feb. 1-2
Mar. '05 2.59% Mar. 22
Apr. '05 2.77% No Meeting
May '05 2.97% May 3
June '05 2.99% June 29-30
July '05 3.13% No Meeting
Aug. '05 3.22% Aug. 9
Sep. '05 3.29% Sep. 20
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Considering the way Greenspan does business, it is highly unlikely the Fed will have any surprises this week. Therefore, examine carefully the post-meeting statement the FOMC will issue on Wednesday for any hints of possible future deviations from what currently is expected. What currently is expected is the probability of yet another 25 basis-point hike in the funds rate at the FOMC's March meeting.
Some level of federal funds becomes a deflection point of sorts for the so-called "carry trade" in which many hedge funds remain engaged. A few weeks ago, I opined that a 2.25% rate was likely around the cusp of such a level. My instincts are that something in the 2.50% to 2.75% area represents the level at which deleveraging starts to become obligatory.
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