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"Forward-looking Guidance on Policy Has [Out]Lived its Useful Life"

Front page WSJ story on the Fed's troubles convincing Wall Street that even it (the Fed) doesn't know when interest rate rises will end:

"Federal Reserve is having trouble delivering a new message about how far it expects to raise interest rates: It isn't sure.

Financial markets, having grown accustomed to the Fed telling them where rates are headed, seem unwilling to hear that new message. After nearly two years of raising rates, the Fed's efforts to convey that it isn't certain where they are headed now have been read by markets, instead, as a forecast of where it will take rates. Changing interpretations of that forecast have been roiling the markets in recent days.

A potentially bigger problem for new Fed Chairman Ben Bernanke is that, with the latest growth data robust and inflation ticking higher, markets also seem to fear that the Fed will stop raising rates too soon. Since Mr. Bernanke talked last week on Capitol Hill about the possibility of a pause in the Fed's rate increases, bond and commodity markets have signaled increased concern about inflation.

The next FOMC meeting is next Wednesday, and its a lock the Fed Funds Rate gets pushed up to 5%. Kremlinologists will also dissect the end-of-meeting statement for changes in adverbs and sentence structure.

Will they say "further rate increases may be needed?"

That's the key line that will make traders sell stocks, buy them back, sell them again, rally the markets, reverse 'em, repurchase, sell, sell short, cover and go long -- all in the span of about 45 minutes. Then they can go home.   

After the May 10 meeting, the next FOMC get together is seven weeks away. The Journal notes "by that time, the data may make the decision clear to both the Fed and the markets." Let's hope so.

Source:
Fed Struggles to Convince Markets Of Its Own Uncertainty on Rates
GREG IP
WSJ, May 3, 2006; Page A1
http://online.wsj.com/article/SB114661897580842186.html

Wednesday, May 03, 2006 | 06:07 AM | Permalink | Comments (4) | TrackBack (0)
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Comments

Hi Barry, We sure are in uncertain times. I'm curious how recent developments have impacted your 2nd half predictions for the DOW. How much longer can this market absorb high crude oil prices, a housing market thats rolling over, and inflation pressures on the consumer? Appreciate your views. Thanks.

Posted by: dave | May 3, 2006 6:26:30 AM