What a bunch of idiots! Sort of like asking if a house fire should be fought with a garden hose, or buckets from the faucet.
Fed Seen Poised to Drop `a Considerable Period' From Policy
Dec. 4 (Bloomberg) -- Ever since August when the Federal Reserve said it will keep interest rates low for ``a considerable period,'' the bond market has been obsessed with that phrase.
A debate is now raging among economists about when ``a considerable period'' will be dropped from the central bank's policy statement by the seven Fed governors and five Fed bank presidents who make up the Open Market Committee. Twelve of the 22 so-called primary U.S. government securities dealers, firms that trade with the Federal Reserve Bank of New York, expect it to happen Tuesday, according to a Bloomberg News survey.
``Circumstances have changed,'' said Robert DiClemente, chief U.S. economist at Citigroup Global Markets Inc. in New York. ``So many indicators are suggesting the recovery is durable and sustainable that the logic behind it seems no longer relevant.''
With little risk of an acceleration in inflation, ``the committee believes that policy accommodation can be maintained for a considerable period,'' the statement after the central bank's Aug. 12 meeting in Washington said. Some economists said the statement by Fed Chairman Alan Greenspan and his colleagues was ill-advised because its eventual removal will create the expectation that a rate increase is imminent.
``If I were running the show, I wouldn't have put it in in the first place,'' said Richard Berner, chief U.S. economist at Morgan Stanley & Co. in New York. ``With respect to inflation, it's not clear circumstances have changed all that much,'' said Berner, who expects the Fed to retain the language.
`Disruptive'
The consumer price index, the government's main measure of the cost of living, was unchanged in October. Fed officials, including San Francisco Fed President Robert Parry, said they aren't concerned that growth will contribute to inflation.
The 10-year Treasury note's yield, a benchmark for mortgages and corporate borrowing, has hovered between 4 percent and 4.5 percent since the Fed's Aug. 12 statement, compared with a range of 3.46 percent to 4.59 percent from July 1 through Aug. 12. That stability may be threatened by keeping ``considerable period,'' said David Resler, chief economist at Nomura Securities International Inc. in New York.
The longer Fed officials repeat the phrase, ``the likelier it is to be disruptive when they do get around to dropping it,'' Resler said. He expects the central bank to do just that in the statement it will issue after Tuesday's meeting.
The Fed lowered its interest-rate target for overnight loans between banks, known as federal funds, 13 times since January 2001 to keep the economy growing amid a slump in business spending. The most recent decrease, in June 2003, reduced the target to 1 percent, the lowest since 1958.
Paying Off
The rate cuts may be paying off: The economy grew at an 8.2 percent annual pace in the third quarter, the fastest in almost 20 years, and employers hired more workers in August, September and October than in any three-month period since the one ending in January 2001.
The phrase has ``outlived its usefulness,'' said Peter Hooper, chief economist at Deutsche Bank Securities Inc. in New York. Deutsche expects the Fed to drop the language at Tuesday's meeting and raise rates next June.
Treasuries indicate some traders are betting the central bank will raise interest rates as soon as March to keep the expansion from sending the inflation rate higher. The yield on the two-year Treasury note, considered the most sensitive to changes in central bank policy, rose as high as 2.14 percent on Monday, pushing the difference between it and the Fed's target interest rate to the widest since July 2002.
Productivity
Ten of the economists said the Fed will continue to insist that interest rates will remain low for ``a considerable period.'' It may be a year before the Fed lifts rates because the economy's performance as it recovers from the 2001 recession will probably be uneven, said Ethan Harris, chief economist at Lehman Brothers Inc.
``We've had one great quarter, but they probably need to see several more good quarters before they actually hike interest rates,'' said New York-based Harris, who thinks the next rate increase will come in the first quarter of 2005.
In addition, labor productivity has been rising, a trend that may mean the economy can grow at a faster pace without stoking inflation, said Mickey Levy, chief economist at Banc of America Securities Inc. in New York. Productivity rose at a 9.4 percent annual rate in the third quarter, the fastest pace in 20 years.
The Fed introduced ``considerable period,'' 11 days after the Labor Department said employers cut jobs for the sixth straight month in July. With the inflation rate of goods and services excluding food and energy already at the lowest level since the 1960s and the global economy awash in excess industrial capacity, policy makers were concerned the recovery might be jeopardized by a further decline in prices.
Commitment
Open Market Committee minutes indicate Fed officials aren't in agreement on continued use of the phrase. On Sept. 16, they showed policy makers ``generally agreed that the Committee should not usually commit itself to a particular policy stance over some pre-established, extended time frame.''
``The course of policy would be determined by the evaluation of the outlook, not the passage of time,'' the minutes said.
Central bankers ended up keeping the phrase in their September and October statements, because to change it ``might suggest the members' views on the economy had changed markedly,'' the Sept. 16 minutes said.
`Trial Balloon'
In a Nov. 6 speech to the Securities Industry Association in Boca Raton, Florida, Greenspan repeated policy makers' assessment that the rate of inflation is more likely to decline than to rise. Then he added: ``In these circumstances, monetary policy is able to be more patient.''
Such a phrase is likely to replace ``considerable period'' in the Fed's Dec. 9 statement, said William Quan, chief economist at Mizuho Securities USA Inc. in Hoboken, New Jersey. The remark was ``a trial balloon,'' said Quan, who expects the central bank to drop the phrase on Tuesday.
Subsequent speeches by other Fed officials, including William Poole, president of the Fed's St. Louis branch, underscored that a rate increase isn't imminent because inflation remains tame amid signs of economic strength.
``They made a mistake with that language and are trying to find a way out of it,'' said Edward McKelvey, senior U.S. economist at Goldman, Sachs & Co. in New York. ``The sooner they take it out, the better, because they still do have time'' to keep rates low, he said.
Firm Will Fed Drop When Will 12/2004
`considerable Fed Raise Rate
period' Rates?
on Dec. 9?
ABN Amro N June 2004 2.00
BNP Paribas Y H1 2004 2.75
Banc of America N Q3 2004 1.75
Banc One N June 2004 2.00
Barclays Y Q4 2004 1.50
Bear Stearns Y March 2004 3.00
CIBC N H1 2005 1.00
Citigroup Y Q1 2005 1.00
Credit Suisse (1) N NA 1.00
Daiwa N Q4 2004 1.50
Deutsche Y June 2004 2.00
Dresdner (2) N NA 1.00
Goldman Sachs Y H2 2005 1.00
HSBC (3) Y NA 0.75
J.P. Morgan N Sept. 2004 1.50
Lehman N Q1 2005 1.00
Merrill Lynch (1) Y NA 1.00
Mizuho Y Q1 2005 1.00
Morgan Stanley N Q3 2004 1.75
Nomura Y Q1 2005 1.00
RBS Greenwich Y June 2004 2.25
UBS Y Aug. 2004 1.75
(1) Credit Suisse and Merrill Lynch forecast the Fed won't raise
rates until at least 2005.
(2) Dresdner forecasts the Fed will lower rates in Q1 2005.
(3) HSBC forecasts the Fed will lower rates in Q1 2004.
Last Updated: December 4, 2003 00:01 EST |
