Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

Strategies & Market Trends : MDA - Market Direction Analysis -- Ignore unavailable to you. Want to Upgrade?

To: Les H who wrote (21770)	8/2/1999 3:38:00 PM
From: Les H	Respond to of 99985

CLEVELAND FED: JUNE RATE HIKE 'NEUTRAL' MOVE RELATIVE TO MARKET By Steven K. Beckner Market News International - There is room for at least two more increases in the federal funds rate, or so the Cleveland Federal Reserve Bank implies in its latest "Economic Trends." The Cleveland Fed publication maintains that the Fed's 25 basis point hike in the funds rate to 5% on June 30 was nothing more than a "neutral" policy move relative to rising market interest rates and that, indeed, the Fed had "implicitly eased" monetary policy by holding the funds rate steady for so long. It points out that federal funds futures presume a 5.5% funds rate by year-end. The publication, prepared by the bank's research director Mark Sniderman and his staff, further points out that a year ago, when the Federal Open Market Committee was leaning toward tightening, policymakers were "entirely comfortable" with "a more restrictive policy" than prevails presently, even in wake of the June tightening. And it observes that the economy is exhibiting "the same torrid conditions" as prevailed a year ago when the FOMC adopted a tightening bias at a time when the funds rate was 5.5%. The Fed eased the funds rate by 75 basis points last fall to deal with global financial market strains, but as those "clouds" have receded and been replaced by the "hot rays" of the sun, the economy needs "sunscreen," a lead essay in "Economic Trends" maintains. It is better to act early than to "rely on aggressive therapy later on," the essay asserts. The publication generally reflects the views of Cleveland Fed President Jerry Jordan, who is not a voting FOMC member this year but will be next year. The lead article begins by stressing that the June 30 rate hike reflected the FOMC's perception that "the full degree of adjustment" represented by last fall's rate cuts was no longer needed now that the Asian financial crisis has eased and goes on to compare today's economic conditions with those of last spring. "The current economic climate in the United States still shows the same torrid conditions that prevailed when the FOMC met in March and May of 1998," the article observes. The Fed staff at that time was forecasting a slowing of economic growth, but "We know now that the shift to a more temperate climate did not occur," the article goes on. At those spring 1998 meetings, the FOMC adopted an asymmetric directive biased toward tightening with the funds rate already at 5.5%, and the Cleveland Fed editorial points out that "the committee was entirely comfortable at the time with a more restrictive policy stance than prevails today, even after the recent funds rate hike of 25 basis points." Although some have argued that it was premature for the Fed to raise the funds rate, the essay contends, "Just as a body can be exposed to too much sun, an economy may not be able to absorb too much activity without suffering side effects like inflation, poor credit decisions and inflated asset prices." "The more layers of skin are burned, the riskier the corrective treatment," it continues. "Monetary policymakers have learned that it is better to act early than to rely on aggressive therapy later on. The success of this reasoning should be self-evident to observers of this long and prosperous expansion." The Fed's willingness to maintain a "low-grade" funds rate or "inflation protection factor" has helped sustain the expansion, "but monetary policy always requires a balancing of risks," the essay continues. "When the clouds recede and the hot rays return, restraint always seems more objectionable because it is equated with the end of the expansion. The fallacy of this logic too should be self-evident. But trust me on the sunscreen." Elsewhere in "Economic Trends," the Cleveland Fed staff supports the thrust of the lead essay by pointing out that fed funds futures imply "the federal funds rate is now expected to climb to 5.5% by the end of this year, indicating that further rate increases are anticipated." They also point to the uptrend in both short-term and long-term interest rates relative to the funds rate. "The increase in market interest rates over the past six months suggests that by holding the federal funds rate constant over this period, the Federal Reserve has implicitly eased monetary policy," the publication states. "In this light, the recent increase in the federal funds rate may be viewed as a neutral policy response." The monetarist staff notes that broad money growth (though not narrow money growth) has slowed, but observes "relatively strong money growth rates exceeding GDP growth for periods of four years -- and perhaps as short as two years -- should concern policymakers. Whether the money growth rates experienced in the last two years fit this pattern remains to be seen." The publication says the "strong upward movement in the CPI growth trend this year" shows that "the CPI is finally behaving as most policymakers have long anticipated." "The belief that tight labor markets would trigger an inflationary upturn has not been confirmed thus far," the publication says. "Nevertheless, there remains a widespread expectation that the inflation rate in our future is likely to be higher than in our recent past."