Prague Twin

Wednesday, May 09, 2007

Speed Blogging

In a unanimous decision, the Federal Reserve has decided to keep rates on hold. This is exactly what I expected and continue to see for the near future. It gets kind of boring to say over and over again, but quite simply, despite slowing growth largely attributable to the housing market and the manufacturing sector (chiefly the automotive sector) inflation pressures will prevent the Fed from cutting rates any time in the near future. The absolute earliest chance is now the August meeting, but I figure that it is likely that rates will stay on hold until at least September, and I'm not ruling out a hike by the end of the year.

The statement was slightly more hawkish than the last, but largely the same. Wall street is experiencing some ripples, but nothing drastic.

At least not yet.




6 Comments:

  • I'm glad they have at least held the rates. The real estate market is just starting to buzz here and it has been such an unstable year, we couldn't have stood a hike.

    By Anonymous rockync, at 9:53 PM  

  • praguetwin, you wrote:

    "In a unanimous decision, the Federal Reserve has decided to keep rates on hold. This is exactly what I expected and continue to see for the near future...inflation pressures will prevent the Fed from cutting rates any time in the near future. The absolute earliest chance is now the August meeting...and I'm not ruling out a hike by the end of the year."

    I see you like sticking your neck out.

    The following news suggests others disagree with your predictions.

    This just in:

    "Stocks Higher After Inflation Data

    Friday May 11, 12:30 pm ET

    By Joe Bel Bruno, AP Business Writer

    Wall Street Resumes Advance After Inflation, Retail Sales Reports

    NEW YORK (AP) -- Wall Street resumed its advance Friday as investors interpreted a government report of milder inflation as a signal that the Federal Reserve might consider cutting interest rates later this year. The Dow Jones industrials gained nearly 100 points."

    By Blogger no_slappz, at 6:45 PM  

  • More Wall street exuberance because of an anticipated rate cut.

    Yawn. I've been seeing that since last summer. You were the one who argued that wasn't the reason for the gains. Changing your mind?

    Early in 2007 I believe the odds of a 25 basis point cut by May were about 30% with a 50 point cut getting another 10% (based on Fed rate futures).

    I didn't believe it then, and I don't believe it now.

    Sure, core PPI surprised to the down side, but over all PPI is still .7% MoM. We will see what CPI does next week.

    But in fact this is all fairly moot since the Fed prefers the PCE deflater which is still well outside their comfort zone.

    August cut at the very earliest. Yeah, I'll stick to that.

    By Blogger Praguetwin, at 7:24 AM  

  • praguetwin, you wrote:

    "I've been seeing that since last summer. You were the one who argued that wasn't the reason for the gains. Changing your mind?"

    I'm not a Fed watcher. Quibbling about the next 25-basis point Fed move is as valuable as arguing about prouncing the tuberous root as "potato" or "potaHto".

    To argue that rates will remain unchanged till almost the 4th quarter is to support the notion that things will go pretty well if you are right.

    Meanwhile, as those who like to needle economists say, "economists have predicted 9 of the last 5 recessions."

    In any case, the only view to champion these days is the view of Milton Friedman. The faster more of the world adopts his prescriptions for prosperity, the sooner everyone on the planet will gain.

    By Blogger no_slappz, at 2:06 AM  

  • You may be right on your last quote, and I've heard the 9 of 5 quote as well.

    I'm not predicting a recession.

    Funny how you say quibbling about a 25 basis point move is silly, and yet that is the reason for Friday's gains.

    So which is it? Significant or not?

    I argue it is significant.

    By Blogger Praguetwin, at 8:00 AM  

  • praguetwin, you wrote:

    "Funny how you say quibbling about a 25 basis point move is silly, and yet that is the reason for Friday's gains."

    The ebullience was not the result of expectations for a possible Fed Funds rate cut. The market rose because current data suggested, hinted, leaned toward the possibility that our low inflation rate might decelerate. Actual rate cuts lag the market evidence that prices are not rising much.

    You asked:

    "So which is it? Significant or not?"

    Now you're asking two questions. One rhetorical. One not. The market rallied on the observation that our already low inflation rate might decline. Thus, the market has spoken. The market is an opinion machine.

    But what opinion has it shared? That smooth sailing lies ahead for at least the next year? Or that many people think the latest news is a good short-term opportunity for trading on inflation expectations?

    What will happen on Monday? Will the market give back much of its one-day gains? If I were a trader, I would position Monday's trades guided by that expectation.

    As to what I think. I think we're in a low-inflation period that shows no signs of ending. However, there is always the wildcard. In today's world, that wildcard is muslim terrorism conducted in the free world or in the oilfields of the middle east.

    In any case, the world can handle slow, steady interest-rate increases without turmoil. Of course there is a point of pain. But I think we have a sound understanding of when rates have reached that point.

    On the other hand, there's also a point of pain on downside. Deflation isn't desirable either. Thus, historically low Fed Funds rates are not a good goal. In short, I think we're in the sweet spot. Based on your predictions for a quarter-point Fed Funds increase by the end of this year, we're not moving out of the sweet spot anytime soon.

    You said:

    "I argue it is significant."

    Why? A quarter-point increase later this year will lead to no change in economic behavior. Your economic weather reports suggests mostly sunny skies ahead.

    By Blogger no_slappz, at 4:11 PM  

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