Summary
Today at 2:15 PM (ET), we find out whether the Federal Open Market Committee decided to pull the trigger again, with its 11th increase in the Federal Funds Rate from June 2004 forward.
And the envelope, please...
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Most of the Fed's 10 increases in its federal funds target rate from June of last year forward have been tantamount to no-forecast forecasts. Predicting what the FOMC does today is somewhat more problematic, made so by those on Wall Street who try to use interest-rate developments to "manage" stock prices. ("Manage" as in "manipulate"? Yes, as in "manipulate"!)
I continue to believe the FOMC will hike rates another 25 basis points today. If so, it will mark the 11th increase in 11 opportunities, dating back to June of last year. The 10 actions already in place have seen the funds rate go from 1.00% to 3.50%. The last increase took place at the FOMC's meeting on August 9th. (See the table at the end of the text for a history.)
Some important points, as I see them, from the minutes of the 8/9 meeting:
"In the Committee's discussion of monetary policy for the intermeeting period, all of the members favored raising the target federal funds rate by 25 basis points to 3.5 percent at this meeting. Even with this action, the federal funds rate would remain below the level that members anticipated would prove necessary to contain inflation pressures and keep output near potential, and thus in all likelihood further policy action would be required. However, the pace of future policy moves, although likely to be measured, as well as the extent of those moves, would depend on incoming data.
"...Members agreed that it was appropriate to acknowledge the recent relatively low monthly rates of core inflation, but also to emphasize that inflation pressures remained elevated. As in past meetings, there was some discussion about the desirability of including forward-looking language in the statement, but members agreed to retain the forward-looking language for now."
"...The pace of future policy moves... would depend on incoming data" is the portion of the above text recently seized upon by Wall Street stock bulls to further their attempt to sell the idea the Fed will pause today in raising rates.
Hurricane Katrina's expected negative impact on the economy is what the Street has used to twist the "incoming data" part. But... the aftermath of Katrina has had a negative consequence that is obvious -- higher near-term energy prices -- and at least a couple prospective ones that may be less obvious. To wit:
(1) The President's writing a blank check for restoration has some very inflationary implications.
(2) The federal aid already expended plus future funds for rebuilding will increase Treasury borrowing needs significantly in coming months. (There are ancillary costs, too, like a near-term decline in payroll taxes and an increase in unemployment benefits to the many thousands of workers displaced by the storm.)
Thus, there are more potential inflationary threats from Katrina than just higher energy prices. These dangers could be exacerbated materially with concurrent overly accommodative monetary policy, particularly if the Fed were to wind up monetizing a major portion of the increase in the Treasury's debt that's on the way. Of course, Congress might choose to cut federal spending to help offset some of this. My hunch is that this is unlikely, particularly as next year's midterm elections draw nearer.
This is all good subject material for future research work. In the meantime, though, I'll leave it at predicting that these considerations as well as others predating Katrina will lead the FOMC to announce its decision to opt for a 3.75% Federal Funds Rate later today. Of course, how the FOMC words today's post-meeting statement will be important, with these documents almost always have an immediate impact on the bond and stock markets.
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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 Aug. Meeting: 3.50% 4.50%
Opening '05 Levels: 2.25% 3.25%
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08/09 REGULAR MEETING, Action Taken:
+25bp to 3.50% +25bp to 4.50%
July NO MEETING SCHEDULED ----------->
06/29-30 REGULAR MEETING, Action Taken:
+25bp to 3.25% +25bp to 4.25%
05/03 REGULAR MEETING, Action Taken:
+25bp to 3.00% +25bp to 4.00%
April NO SCHEDULED MEETING ----------->
03/22 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 ------------>
09/21 REGULAR MEETING, Action Taken:
+25bp to 1.75% +25bpP to 2.75%
08/10 REGULAR MEETING, Action Taken:
+25bp to 1.50% +25bp to 2.50%
July NO SCHEDULED MEETING ------------>
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06/29-30 REGULAR MEETING, Action Taken:
+25bp to 1.25% +25bp to 2.25%
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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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