The Federal Reserve Open Market Committee (FOMC) will announce its decision on interest rates Thursday at the end of a two-day meeting. Although some, including one of my colleagues, believe that the Fed will raise rates (see Sheldon Liber's post, "The Fed may have to raise interest rates") and others believe the Fed may lower rates, I believe it will keep rates on hold for now and for the immediate future. Update: The Fed did, indeed, announce it was keeping rates steady, expressing "some optimism" about a "modest" improvement in core inflation readings.
I think the Fed will mention that core inflation appears to be at the high end of the desired range but is currently under control and emphasize its concern with the spillover effect of higher food and fuel prices on the core rate in the future. This should help it to maintain its credibility as an inflation hawk.
The Fed will discuss the strength of the economy as demonstrated by the low unemployment rate and other economic data but also acknowledge the seriousness of the housing crisis. It will indicate that it does not appear to be spreading to other parts of the economy. This will be necessary to calm Wall Street anxiety that the Fed is not vigilant in preventing a recession.
The Fed could do something in the future but only if there is an overheating or severe worsening of the economy. This Fed does not want to take action unless absolutely necessary. None of the economic data indicates immediate action is required.
Many economic problems which concern Wall Street but do not affect the American economy are not catalysts for Fed decision-making. The Fed will acknowledge that it is carefully monitoring these concerns for any indications that they are deteriorating into something serious requiring immediate action. However, a decrease in Wall Street earnings or the bonus pool does not fall into this category.
Hopefully, the FOMC statement will relieve some of the equity markets' recent anxiety. Let's wait until Thursday for the complete story.
Doug Roberts is the chief investment strategist of FollowtheFed.com, an independent research firm focusing on investment strategies using the Federal Reserve's impact on the stock prices.
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Reader Comments (Page 1 of 1)
6-28-2007 @ 2:36PM
Mike said...
I'd like the details on how the Fed figures inflation is only in the 2-3% range. My mechanic raised his rate from $75 to %81 an hour; the dentist raises his rate 4% twice a year, my lawyer raised his rate from %100 to 120 an hour etc.
And I haven't even talked about hikes in grocery prices...
6-28-2007 @ 5:47PM
hal c said...
The government's criteria for measuring inflation is a joke. It is indefensible. The actual inflation rate is about 8%. The Fed is hoping that you won't notice that the Emporer has no clothes....
6-29-2007 @ 7:07PM
fazal ahmad said...
I don't know how govt. figures inflation,plumber charge me 120.00/hour, for 5 hours charged me 800.00 dollars
6-29-2007 @ 10:40PM
christian said...
inflation is higher than stated yes, but the REAL threat is not cutting rates and keeping consumer spending and credit available in such leveraged markets. rising intrest rates will NOT help the dollar in the u.s current situation. foreigners are counting on the fed tanking the market and using there dollars to buy on the cheap