TOUGH' FED STATEMENT CEMENTS ANALYST RATE HIKE
EXPECTATIONS
By Steven K. Beckner
Market News International - Although the Federal Reserve's policymaking Federal
Open Market Committee did not formally adopt a tightening bias after leaving interest
rates unchanged Tuesday, the Fed's announcement of the FOMC decision tilted so
strongly toward higher rates that it cemented expectations of substantial further rate
hikes.
Some Fed watchers said the Fed statement's strong expression of concern about
excess demand increased the odds of a February rate hike in their minds. Others
doubted the Fed will be ready to move that soon, but there was general agreement the
Fed will probably have to raise the federal funds rate 75 basis over the course of the
year. They differed over the exact timing of these rate hikes.
As expected, the FOMC decided to leave the funds rate at 5.5% for now, after
having raised it three times for a total of 75 basis points from June through November,
undoing '98 rate cuts of the same magnitude. Ordinarily, when leaving rates
unchanged, the Fed would have adopted a bias toward higher rates. But the
committee chose to stick with the symmetrical directive or neutral bias adopted at the
Nov. 16 meeting "in light of market uncertainties associated with the century date
change." The Fed said those uncertainties made it desirable to "indicate that the focus
of policy in the intermeeting period must be ensuring a smooth transition into the year
2000."
The highly unusual Fed statement went on to indicate in unmistakable terms,
however, that Fed policymakers are tilting heavily toward higher rates in the fairly
near-term. Indeed, it made clear that a rate hike will be considered at the FOMC's
"next meeting."
The statement, which is usually written by Fed Chairman Alan Greenspan but
vetted with the FOMC before its release, began by revealing that "the committee
remains concerned with the possibility that over time increase in demand will continue
to exceed the growth in potential supply, even after taking account of the remarkable
rise in productivity growth."
"Such trends could foster inflationary imbalances that would undermine the
economy's exemplary performance," the statment went on.
The announcement went even further, after mention of transitional Y2K
considerations, to declare that "at its next meeting the committee will assess available
information on the likely balance of supply and demand, conditions in financial
markets, and the possible need for adjustment in the stance of policy to contain
inflationary pressures."
Expressing amazement at how "tough" the statement was, Aubrey G. Lanston &
Co. chief economist David Jones said it caused him to up his projection of year 2000
rate hikes from 50 to 75 basis points.
"The Fed paused in its tightening but probably only because of Y2K," Jones said.
"I look for an early move in 2000, and we could end up with three quarter point
moves in February, March and June. So I've got the funds rate at 6 1/4% by
mid-year. These comments are certainly consistent with that."
Bank One senior economist Diane Swonk called the FOMC's nominally
symmetrical directive "the most narrowly written bias I've ever seen. It covers
between now and Dec. 31."
Beyond the century date change, Swonk said the Fed seems ready to raise the
funds rate 25 basis points at its Feb. 1-2 meeting. She said she expects a further 50
basis points of tightening in two steps beyond February but not until the August and
November meetings. The total 75 basis points of projected rate hikes would amount
to "just lightly tapping the brakes," she said.
Goldman-Sachs economist Ed McKelvey observed that "for an unbiased
statement it's got a lot of heavy-duty language." Contrasting it to Teddy Roosevelt's
famous dictum, he said the statement "talks big and carries a twig."
While the Fed did not want to adopt an actual tightening bias because of Y2K,
McKelvey said the statement's expression of concern about economic growth
indicates that the Fed is highly likely to raise the funds rate 25 basis points at either the
February or march FOMC meeting. He said he would then expect two more 25 basis
point moves in the second half of next year.
Sung Won Sohn, senior vice president with Wells-Fargo Economics, said he
gathered from the Fed statement that policymakers are "not sure about the course of
the economy and inflation next year, so they decided to take the least risky option of
standing pat with a neutral bias."
Sohn doubted the FOMC will raise rates at the February meeting because it is "too
close to Y2K. By then they will not know what impact Y2K is having." But he said
the Fed is likely to raise the funds rate by 50 basis points at the March 21 meeting,
then another 25 at the May 16 meeting. He said the Fed will want to do its tightening
within a "narrow window" between the end of "the Y2k period" and the start of the
Fall election campaign.
The Fed deferred making a statement on the whole issue of how it handles the
inter-meeting policy bias and its disclosure, but an FOMC subcommittee on the issue
is known to be near completion of its work, and a Fed announcement on its revised
procedure is expected fairly soon. |
