Different Opinion

Fair and balanced comments about the world from the everyday perspective of a welfare-state citizen.

20040922
 

FOMC and the Economy

As you already have heard, the Federal Reserve's Open Market Committee hiked the key interest rate by 25 basis points. The motivation however, was weak. Taken out of its policy context, it would probably have been read by most market participants as a motivation for leaving the rate unchanged, rather than hiking it. You can find the main part of their statement at Brad DeLong's webjournal together with his opinion, which very efficiently spells out doubts that many people (at least in the bond markets) probably share:
I have a hard time imagining a world next summer in which the Fed is sorry that it did not raise interest rates today. But I have an easy time imagining a world next summer in which the Fed is sorry that it did raise interest rates. So I'm having a hard time understanding their thinking.
Barry Ritholz sees signs indicating possibilities for the "sorry it did raise"-scenario. Under the headline "Double Squeeze: Between a Rock and a Hard Place" he quotes a commentator as saying:
"for the first time in 3 years, there are no government tax cuts, no checks, no other one-off items to spur the economy forward. The refinance afterburner has flamed out, and the Fed is raising rates."
That's a bearish one (three) liner when it comes to the prosperity of the economy and the business cycle development, and quite bullish for bond-prices. Prices which by the way actually strengthened on the FOMC announcement.




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