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Strategies & Market Trends : The Epic American Credit and Bond Bubble Laboratory
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To: russwinter who wrote (66939)7/26/2006 9:20:16 PM
From: CalculatedRisk  Read Replies (1) of 110194
 
Fed Watch: Still Watching the Data
economistsview.typepad.com

Dr. Tim Duy gives an excellent overview of the Fed's thinking ... excerpt:

Futures markets appear to have no clear conviction on the outcome of the next FOMC meeting. The message is that market participants are looking for one more rate hike, either in August or September. Moreover, they doubt the Fed’s position that “pause does not mean done.” That’s one of the messages from Jim Hamilton’s exposition on the yield curve. In fact, not only do market participants expect the next hike to be the last, they anticipate that the Fed will soon be rolling back the rate hikes.

The argument for another rate hike in August is straightforward – sure the economy is slowing, but is it slowing enough given that it is already bumping up against resource constraints? Moreover, with core-CPI posting four consecutive 0.3% readings, policymakers will appear to be accommodating higher inflation by failing to match it with higher interest rates, and thus will be setting the stage to fuel expectations of higher inflation. This essentially forms the backbone of my sense last week that the Fed was more likely than not to hike rates in August before pausing. The most recent employment, CPI, and industrial production reports, in my opinion are supportive of that position.

The counter-argument is that with the economy showing visible signs of slowing, particularly the combined housing/consumer sector, we are at an inflection point that calls for additional caution on the part of the Fed.

<MUCH MORE AT LINK>
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