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Economists React to the Fed

Ok, this WSJ posting festival ends now.

Just one more, please?

All right, last one:
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As expected, the Federal Reserve increased its key federal-funds rate target Tuesday by a quarter percentage point to 3%, the eight increase in as many meetings, bringing the rate to its highest mark since shortly after the Sept. 11, 2001 terror attacks. In its accompanying policy statement, the central bank said it remains worried about inflation despite signs of slowing economic growth. What's next? Economists on Wall Street and elsewhere weigh in:

* * *

Extraordinarily, the Fed has corrected its statement, adding back the line from the previous four statements that "Longer-term inflation expectations remain well-contained". Note that the other line dropped from the statement, that "the rise in energy prices ... has not notably fed through to core prices" has NOT been restored. The net effect of this is to make the Fed's message a bit less stark, but the clear signal remains that (a) rates are still too low (b) inflation pressures are building and (c) the slowdown is nothing like severe enough to induce a pause in the rate hikes. Conspiracy theorists will likely have a field -day with this bizarre turn of events, but we think that old-fashioned human erroris more likely the story.

--Ian Shepherdson, High Frequency Economics

~~~~~

The pace of tightening in the second half is more of an open question than it was in the first half, with question marks surrounding both the pace of growth and the rate of core inflation. Policy moves will be data-driven, and public comments from FOMC members will guide markets in an effort to avoid surprises at upcoming FOMC meetings.

--Joshua Shapiro, Maria Fiorini Ramirez Inc.

~~~~~

The bond market might have been hoping for more, especially along the lines of reaching a completion of their rate rising cycles, but given the circumstances and the fact that they were unanimous, there was probably little discussion of stopping anytime soon. All in all, it was less than what the bond folks wanted, somewhat less than what the equity folks needed and exactly what was predicted. Now, back to sleep.

--Kevin Giddis, Morgan Keegan

~~~~~

By repeating that policy is accommodative the Fed continues to signal that even with this move we are still some way from neutrality. By repeating measured, the Fed suggests the most likely policy step on June 30th is another quarter-point rate hike. However, the stage is set for a larger adjustment in interest rates at some point if the inflation data move out of the Fed's comfort zone.

--John Ryding, Conrad DeQuadros, Elena Volovelsky, of Bear Stearns

~~~~~

We continue to look for a 4% fed funds rate target at year end and believe that they will drop or change the "measured" and "accommodative" language in August or September. By that point in the tightening cycle, they are likely to be less willing to provide forward looking policy guidance.

--David Greenlaw and Ted Wieseman, Morgan Stanley

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Source:
Economists React
WSJ, May 3, 2005 4:30 p.m.
http://online.wsj.com/article/0,,SB111514538388523513,00.html

Tuesday, May 03, 2005 | 09:30 PM | Permalink | Comments (2) | TrackBack (0)
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Comments

This bit of slapstick with the missing line makes starkly obvious how ridiculous the focus on the Fed and their micromanaging has become.

What would Ayn Rand think?!

Posted by: mh497 | May 3, 2005 10:09:11 PM

The markets rally so big tomorrow. OMFG! I cant believe what a punk we have for a central bank! I'm referring to the 4p.m "update" to the statement. I dont know if we sustain that rally, but the shorts wanted to send a message to the fed, and they got it. 3.5 is the ceiling - ceteris paribus.

Posted by: james | May 3, 2005 10:17:23 PM