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Summary
It is a virtual certainty the Federal Open Market Committee will announce another 25 basis-point increase in the Federal Funds Rate at the conclusion of tomorrow's meeting. While the FOMC's post-meeting statements always get inordinate scrutiny, the one to be issued tomorrow will get an even closer look! Will the communique be designed to gun the stock market?
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It is all but certain the Federal Open Market Committee will hike the funds rate a quarter point at its policy meeting tomorrow. If so, it will mark the eighth such increase, from 1% to 3%, since late last June. In fact, if another hike is forthcoming, 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.)
As to the rate action itself, I think it's entirely safe to defer to the views of the futures market. As of last Friday's close, it indicated a 100% bet on a funds rate of 3% after tomorrow's meeting.
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FEDERAL FUNDS FUTURES
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04/29 03/18 Scheduled
Contract Close Close Change FOMC Meetings
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May '05 3.00% 3.04% -4bp May 3
June '05 3.03% 3.07% -4bp June 29-30
July '05 3.24% 3.32% -8bp No Meeting
Aug. '05 3.38% 3.47% -9bp Aug. 9
Sep. '05 3.47% 3.58% -11bp Sep. 20
Oct. '05 3.55% 3.69% -14bp No Meeting
Nov. '05 3.65% 3.81% -16bp Nov. 1
Dec. '05 3.72% 3.89% -17bp Dec. 13
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Prompted by some of the weaker-than-expected economic data in evidence recently, in which you must now include today's ISM report on manufacturing, there is a growing perception the FOMC will use the occasion of tomorrow's post-meeting communique to throttle back expectations regarding future rate increases -- at least the pace of them. And you can certainly see some of this perception reflected in the later months of the above numbers. (March 18th was a few days before the last Fed policy meeting.)
But as I assess the situation, there is another phenomenon afoot. It evolves from Wall Street's growing frustration about the behavior of the stock market and the Street's fervent wish to get the market in an unequivocal forward gear again.
Alan Greenspan has been hellaciously subservient to Wall Street's desires, leading to his reputation in some circles as, "Uncle Al, Wall Street's pal." Thus, don't rule out some trickery in the statement's wording, designed specifically to foster better stock-market behavior.
The Greenspan "legacy" thing is at work, as well. Uncle Al finally departs his post no later than next January 31st. A seriously negative 2005 in the equity market is surely not something on his list of things for which he wants to be remembered. In addition, the balance-sheet wealth of the household sector has been an important consideration at the Federal Reserve, in its ongoing efforts to manipulate consumer spending habits.
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An Aside, Re: The Stock Market
I'm planning on a detailed equity-market update soon, probably next weekend. In the meantime, an important thought or two.
I continue to believe that the back of the cyclical bull has been broken, and that the market has now reverted to its primary secular-bear trend. There will be fits and starts, to be sure, but I do not think the market's most recent highs will be taken out, but I do think the recent lows will surely be eclipsed. And eclipsed by sizable amounts as this year wears on.
(Readers may want to have a look at, "Stocks: 'Red Alert' Reviewed and Updated," which was written on 4/11/05.
At present, I think the market is fetching for the area at which the advance that began last week will be arrested. In this regard, how the FOMC decides to word tomorrow's statement could be quite important.
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Which Is a Neat Segue Back to "the" Statement
The communique coming out of the 3/22 meeting contained some subtle but important changes from its predecessors. As I assessed the March installment, its key points were:
"The Committee believes that, even after this action, the stance of monetary policy remains accommodative...Though longer-term inflation expectations remain well contained, pressures on inflation have picked up in recent months and pricing power is more evident."
The above replaced:
"The Committee believes that, even after this action, the stance of monetary policy remains accommodative...Inflation and longer-term inflation expectations remain well contained."
From the 3/22 statement:
"...The Committee perceives that, with appropriate monetary policy action, the upside and downside risks to the attainment of both sustainable growth and price stability should be kept roughly equal. With underlying inflation expected to be contained, the Committee believes that policy accommodation can be removed at a pace that is likely to be measured."
The above replaced:
"...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."
I won't pull apart the key differences; they may be subtle but they are also self-evident. But here is the area in which some sizable "wiggle room" emerges to gun the stock market. Simply change the wording regarding "accommodative" a little. Anything that vaguely suggests the FOMC thinks a 3% funds rate is at or even approaching neutrality will do the trick!
The Result
I suspect there is a decent chance of some modification along the lines suggested above. And the Greenspan thinking here might be that a little goes a long way, since the next FOMC policy meeting is not until late June.
However, during the Greenspan tenure, the Fed has created an ever-growing labyrinth of trip wires capable of inflicting great economic and market damage. Unfortunately, it is now inevitable that at least some of this damage will come to pass. It is Uncle Al's fervent hope that he is out of office when it does.
If there is a change in the statement in the direction I outlined above, stocks will launch on the upside -- initially, at least. In turn, this will provide a wonderful opportunity to assess just how much damage the stock market has incurred in recent weeks. To wit: How far does the rally go before investors who have been sitting with too much stock exposure and too little cash see the rally it as a great chance to sell?
On the other hand, in the growing world of unintended consequences, how does the dollar react?
There's no question at all in my mind that the better bid under the greenback has been the direct result of an assumption the Fed would keep raising short-term rates. If the FOMC clouds this assumption, you could see the dollar come under significant pressure. If so, the timing could be anything but propitious, with many people thinking the Chinese are getting closer to some kind of float or revaluation of the Yuan.
(As an aside, I want to point out that despite its increased volatility lately, physical gold has performed quite well agasint a firm dollar, setting up a developing positive divergence.)
At any rate, we don't have long to wait to find out what happens at tomorrow's meeting. If stocks do take the outcome as a positive, I would certainly suggest that people who do want more cash act accordingly!
NOTE: Readers may also want to have a look at:
"ISM April Manufacturing-Sector Data" (dated 5/2/05)
"Tomorrow at the FOMC" (dated 3/21/05)
"Do Stocks Have Life After War?" (dated 3/18/03)
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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 Mar. Meeting: 2.75% 3.75%
Opening '05 Levels: 2.25% 3.25%
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3/22 REGULAR MEETING, Action Taken:
+25bp to 2.75% +25bp to 3.75%
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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