Summary
Tomorrow at 2:15 PM (ET), we will learn whether the Federal Open Market Committee decided to pull the trigger yet again, with its 12th increase in the Federal Funds Rate from June 2004 forward.
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Most if not all of the Fed's 11 increases in its federal funds target rate from June of last year forward have been tantamount to no-forecast forecasts. Events of the last several weeks put tomorrow's outcome in the same category. There is little doubt the FOMC will hike the funds rate an additional quarter point, to 4.00%.
If this is what comes to pass, it will mark the 12th increase in 12 opportunities, dating back to June of last year. The 11 actions already in place have seen the funds rate go from 1.00% to 3.75%. The last increase took place at the FOMC's meeting on September 20th. (A history of the hikes appears in the table at the end of the text.)
Some important points, as I see them, from the minutes of the 9/20 meeting:
The Committee's decision at its August meeting was widely expected in financial markets and evoked little price reaction. Over the intermeeting period, however, investors marked down their expectations for the path of policy, partly in response to the devastation caused by Hurricane Katrina. Nominal Treasury yields decreased about in line with the revision to policy expectations.
"...In the forecast prepared for this meeting, the staff lowered its projection for economic growth over the remainder of 2005 in light of the economic dislocation associated with Hurricane Katrina. At the same time, however, the staff increased the growth rate forecast for 2006 to reflect the boost to economic activity from the rebuilding effort. By 2007, the level of output was expected to move back to the path it would have followed in the absence of the storm. The staff revised upward its forecast of overall inflation for 2005 and of core inflation for 2006, reflecting the effects of higher energy prices, but lowered its projection for overall inflation slightly for 2006.
"...In their discussion of the economic situation and outlook, meeting participants agreed that output and employment appeared to have been growing at a good pace before Hurricane Katrina's landfall. Business fixed investment had been a little softer than expected, but household spending had been especially strong. Participants agreed that the widespread devastation in the Gulf Coast region and the dislocation of many people would hold down indicators of spending for a time. But they also were of the view that aggregate demand and output would likely rebound before long, fueled in part by private spending to rebuild and outlays by the federal government to assist in the recovery.
"...With regard to fiscal policy, meeting participants noted that federal outlays would increase sharply in order to assist with recovery and reconstruction efforts in the aftermath of the hurricane. The eventual size of the increment to federal outlays was unclear, but it was likely to be quite large. The substantial step-up in government spending would add to federal deficits that were already large and underscored the worrisome loss of fiscal discipline evident in recent years. The expansion of federal spending implied an increase in fiscal stimulus at a time when the margin of unutilized resources in the overall economy was probably thin.
"Participants' concerns about inflation prospects generally had increased over the intermeeting period. The surge in energy prices, in particular, was boosting overall inflation, and some of that increase would probably pass through for a time into core prices. This posed the risk that there could be a more persistent influence on inflation should inflation expectations rise. Indeed, some recent survey evidence on such expectations had been troubling, and widening federal deficits were mentioned as a factor that could further stir inflationary concerns.
"...In the Committee's discussion of monetary policy for the intermeeting period, nearly all members favored raising the target federal funds rate 25 basis points to 3-3/4 percent at this meeting. Although uncertainty had increased, in the Committee's judgment the fundamental factors influencing the longer-term path of the economy probably had not been affected by the hurricane, but the upside risks to inflation appeared to have increased. Even after today's action, the federal funds rate would likely be below the level that would be necessary to contain inflationary pressures, and further rate increases probably would be required.
"...In discussing the statement to be released after the meeting, members agreed that it would be appropriate to characterize the macroeconomic effects of Hurricane Katrina, while significant, as essentially temporary...The Committee also agreed to reiterate its previous expectation that '. . . policy accommodation can be removed at a pace that is likely to be measured.' However, some sentiment was expressed to consider changes to forward-looking aspects of the statement at upcoming meetings, in part because of the considerable reduction in monetary policy accommodation that had already been accomplished. ..."
So, the above sentiment made pretty clear that in the absence of decidedly poor reported economic data that have not been forthcoming, another increase in the Federal Funds Rate tomorrow was a very high probability.
As of last Friday, the November federal funds future closed at 4.00%. The respective closes of the December, January, February and March futures were 4.16%, 4.25%, 4.45% and 4.47%. These match up with FOMC meeting dates of 12/13, 1/31 and 3/28. (There is not meeting scheduled for February.) So roughly, the market was holding out the possibility of no FOMC action at its December meeting, but the probability of additional rate hikes totaling 50 basis points by the end of next March.
The question mark left behind by the September minutes comes from the very end of the material quoted above, to wit: "However, some sentiment was expressed to consider changes to forward-looking aspects of the statement at upcoming meetings, in part because of the considerable reduction in monetary policy accommodation that had already been accomplished."
The inclusion of this sentence makes the most important part of tomorrow's meeting the statement the FOMC will issue after the meeting's conclusion. But this generally has been the case for a long time now.
One thing is absolutely certain. Wall Street is desperate to keep the recent rally in stocks going through the end of the year. Therefore, the Street will put the most favorable spin possible on tomorrow's post-meeting statement.
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2004-2005 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 Sept. Meeting: 3.75% 4.75%
Opening '05 Levels: 2.25% 3.25%
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09/20 REGULAR MEETING, Action Taken:
+25bp to 3.75% +25bp to 4.75%
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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