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Summary
It is a virtual certainty that tomorrow, at 2:15 PM (ET), the Federal Open Market Committee will announce another 25 basis-point increase in the Federal Funds Rate. Pretty predictable and unexciting, right? Not necessarily!
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If the Federal Open Market Committee hikes the funds rate a quarter point tomorrow, it will mark the seventh such increase, from 1% to 2.75%, since late last June. In fact, if this is the outcome, the FOMC will have raised this key administered rate at every one of its meetings from last June forward. (See the table at the end of the text.)
Tomorrow's meeting has three possible rate outcomes:
(1) The FOMC does nothing. It maintains fed funds at the current 2.25%.
(2) The FOMC raises the target rate on fed funds by 25 basis points, to 2.75%, as virtually everyone expects it will.
(3) The FOMC raises the target rate on fed funds by 50 basis points, to 3.00%.
I'll live dangerously and summarily assign number one a probability in a range of 0% to 1%. (Which still represents a better chance, of course, than if you picked Kansas, Syracuse, Wake Forest, Boston College or Connecticut to win your March Madness pool.)
As far as numbers two and three are concerned, here is how the futures market sized up the situation, as of last Friday's close. This is always the first place to turn (as opposed, say, to CNBC), since this represents a real market where real people are making decisions based on real money.
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FEDERAL FUNDS FUTURES
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03/18 01/28 Scheduled
Contract Close Close Change FOMC Meetings
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Mar. '05 2.61% 2.59% 2bp Mar. 22
Apr. '05 2.77% 2.77% 0bp No Meeting
May '05 3.04% 2.97% 7bp May 3
June '05 3.07% 2.99% 8bp June 29-30
July '05 3.32% 3.13% 19bp No Meeting
Aug. '05 3.47% 3.22% 25bp Aug. 9
Sep. '05 3.58% 3.29% 29bp Sep. 20
Oct. '05 3.69% NA -- No Meeting
Nov. '05 3.81% NA -- Nov. 1
Dec. '05 3.89% NA -- Dec. 13
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As of last Friday, the people at the Chicago Board of Trade were placing a heavy bet, as in 100%, on possibility number two. And as the table indicates, the March/April judgment is virtually unchanged from just before the FOMC's last meeting.
Actually, what's behind door number three -- 50 basis points -- is the one from which Greenspan would benefit the most, since it would surely get the quick attention of the folks kicking sand in the chairman's face.
The following is from my research missive dated 2/25 ("Does Greenspan Get It?). It's a lengthy excerpt, but a critical one, too, within the context of current events:
"It would appear that congressional testimony, admonitions delivered in various speeches, the minutes of the December 14th Federal Open Market Committee meeting, etc. have not succeeded in moving the [Treasury carry trade] unwinding process along very much. Which means that increasingly, we are dealing with an 'in your face, Alan' situation. Or, put in other terms, there is nothing like biting the hand that has fed you so very well -- or, for so very long, too!
"There's a way to cut this arrogance down to size rather emphatically. (1) To wit: for the FOMC to raise the Federal Funds Rate not by 25 but by 50 basis points at the FOMC's March 22nd meeting, and (2) to begin immediately to get hints of such a possibility in circulation.
"But this is Greenspan and the Greenspan Fed, making the chances of such a bold action quite remote. It simply smacks too much of something a genuine, serious central bank would do."
So, pitch possibility number three! Were this the outcome, though, all hell would break lose in the markets -- literally!
No, if there is excitement coming from tomorrow's meeting, it will come not from the rate action but from the FOMC's post-meeting statement.
But before getting to that topic, I reiterate a point I made a few months ago. A 2.25% Federal Funds Rate was likely on the cusp of problems for the Treasury carry trade. A funds rate of 2.50% probably actually caused some problems (and it also probably resulted in hedge funds making the mistake of extending maturities to preserve spreads). However, a funds rate of 2.75% was likely where some genuine "squeeze pain" set in. I believe those numbers are still about right.
Tomorrow's Post-Meeting Statement
The communique coming out of the 2/1-2 meeting continued to frame FOMC policy in language not materially different than in statements coming out of meetings over the several months that preceded it. As I assessed the February installment, its key points were:
"...The Committee believes that, even after this action, the stance of monetary policy remains accommodative.
"...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. ..."
There are many major-league baseball games during a season in which a pitcher wishes he could take back a hanging curve ball that wound up in the upper deck (or the lower deck in the absence of steroids). I wonder if Greenspan would like to have the following sentence back?
"...Although incoming inflation data are somewhat elevated, a portion of the increase in recent months appears to have been due to transitory factors."
The above sentence was contained in the post-meeting statement of last June's FOMC meeting, and based on FOMC minutes, various speeches, etc., the "transitory factors" clearly were rising energy prices.
Transitory? As of last June 30th, the day the FOMC gave birth to this sentence, crude oil was trading at $37.05, versus last Friday's $57.24. Unleaded gasoline and home heating oil were at $1.16 and $1.01, versus respective closes last Friday of $1.55 and $1.61. As for the CRB Index, which goes well beyond just energy prices, it stood at 265.94, versus 319.20 last Friday.
I'll let readers calculate the percentage changes; they scare me! As does the almost nine months between then and now, since the definition of "transitory" is, well, ah, say, less than nine months?
However, life does get easier and easier when your central bank reduces its policy lexicon to fewer and fewer catch words.
That Uncle Al -- what a mensch!
Therefore, the few words you should be most concerned about and key on most carefully tomorrow, vis a vis the many months preceding, are: "accommodative," "upside and downside risks," and "measured."
My guess is that there will be a modicum of modification. I'll check in again tomorrow with the actual outcome.
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2005-2004 SCHEDULED MEETINGS OF THE FEDERAL
OPEN MARKET COMMITTEE AND POLICY ACTIONS TAKEN
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Action Taken On
Meeting --------------------------------
Date Fed Funds Rate Discount Rate
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2005
Thru Feb. Meeting: 2.50% 3.50%
Opening '05 Levels: 2.25% 3.25%
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3/22 REGULAR MEETING
02/01-02 REGULAR MEETING, Action Taken:
+25bp to 2.50% +25bp to 3.50%
January NO SCHEDULED MEETING ----------->
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2004
Closing '04 Levels: 2.25% 3.25%
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, Action Taken:
+25bp to 2.25% +25bp to 3.25%
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% +25bpP 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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