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Strategies & Market Trends : Currencies and the Global Capital Markets
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To: N who wrote (1741)6/11/1999 10:58:00 AM
From: Henry Volquardsen  Read Replies (2) of 3536
 
I believe the Fed's announcement of a tightening bias has one intent, to begin the process of tightening by having the market start moving rates higher.

Think about how the Fed raises rates. They can raise the discount rate or the Fed Funds rate. That's it. Both are very narrowly used rates. The real impact of both is the signal of intent they give to the rest of the market. Well the announcement of a tightening bias is no different. It is a signal of intent. And it has had very much the same impact, it has caused the market to move rates higher. So I would agree with neither of Blinder's alternatives. It is neither a signal the Fed is more or less likely to move nor is it a signal a tightening is imminent. It is in effect a signal to the market that they want rates to move higher now, in other words they have already begun to tighten. There is nothing imminent about it.

As to what happens at the FOMC at the end of the month, that will largely be a question of whether they feel they are in the process. If they feel market rates have backed up enough they will stand pat. If they want to give the market a stronger signal they will raise Fed Funds. At this point it is 75/25 in favor of them raising. But the really important question is what the Fed will consider is enough. Are they looking for a modest back up or a series of moves. The June 16 CPI number will be important in this regard. But there is no question in my mind that the Fed has already tightened. Introducing the formal announcement of a bias is just a more subtle way of beginning the process.
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