Some economists buck trend and see FOMC holding steady
Monday, August 9, 2004 8:39:38 PM
WASHINGTON (AFX) - Although they are still badly outnumbered, some economists are beginning to question the perceived market wisdom that the Federal Open Market Committee will raise rates Tuesday
Evidence that the economy may be faltering, especially the weak July jobs report, may give central bank policymakers pause, they argue
The most prominent member of the 'hold' camp is Lynn Reaser, chief economist at Bank of America Capital Management
She said the poor employment data "will likely cause the Fed to keep the target fed funds rate at 1.25 percent, pending assurance that the recent pause in economic growth is only temporary." Reaser doesn't think the Fed will be on hold for long. She still expects the federal funds rate to reach 2.0 percent by the end of the year
But for an FOMC that has promised to be gradual, Reaser said that now is the time for patience
The majority opinion The conventional wisdom on Wall Street is that the Fed will go ahead and raise its target for overnight loans by a quarter percentage point to 1.5 percent. These analysts expect the FOMC to signal in its statement that it may be prepared to hold rates steady until after the Presidential election - skipping a rate hike at the Sept. 21 meeting
This thinking is reflected in the fed funds futures contract
"Despite the awkward timing, the Fed's clear confidence in the outlook and belief that policy is overly accommodative warrants a 25 basis point move in August," said Richard Berner and the economic team at Morgan Stanley Equity Research
After all, Federal Reserve board chairman Alan Greenspan told Congress only three weeks ago that the economy had hit a "soft-patch" in June that should prove "short-lived." Many economists still believe that inflation is a bigger threat to the recovery than slow growth
"We would hope that the Fed would still raise rates gradually, even if employment growth is soft in August, since we agree that monetary accommodation threatens higher inflation down the road," said John Ryding and the economic team at Bear Stearns
Jobs and energy considerations But Reaser isn't alone in her forecast. Lou Crandall, chief economist for Wrightson ICAP, said the July jobs report "was jarring enough" to affect the outcome of Tuesday's FOMC meeting
"We think there is less than a 50-50 chance that the Fed will tighten on Tuesday," Crandall said. Robert Brusca, chief economist at FAO Economics, said the Fed has the built-in excuse of higher oil prices to change its mind
"That is why I think the Fed will not hike rates on Tuesday as it had previously planned. I don't care what the Fed funds contract says. I think the Fed has to teach those trading that contract to pay attention to world events whenever they happen, even on the threshold of a Fed meeting," Brusca said
A delicate balance Michael Panzner, equity trader at Rabo Securities and the author of 'The New Laws of the Stock Market Jungle,' said the Fed is "now stuck between a rock and a hard place." "On the one hand, if the central bank moves to slow down the pace of - or even puts a halt to - future rate hikes, it risks creating the unsettling impression that conditions are much worse than what they have been acknowledging," Panzner said
"On the other hand, if Greenspan and company choose to go ahead as originally planned, there is a good possibility that they may end up exacerbating the extent of any downdraft that might now be unfolding," he said
Complicating the outlook a bit was a Wall Street Journal story on Friday quoting unidentified Fed officials saying that the Fed would stay on a patch of steady rate hikes no matter what the July jobs report showed
Some economists believe that Greenspan likes to signal his intended monetary policy at upcoming FOMC meetings to a small group of favorite reporters, including the Journal
fxstreet.com |
