Wednesday, August 9th, 2006
Does the Fed have a clue?
In volatile times like these it’s worth remembering that central bankers are no different from speculators in one respect. They collect data and evidence and make forecasts about the future. But sometimes both speculators and central bankers simply don’t have enough or appropriate information to make a reasoned prediction.
The Federal Reserve statement released with its decision to keep rates on hold made one thing clear: it has no idea what’s going to happen.
The Fed says the economy could slow enough to ward off inflationary threats. But it adds that inflation remains a risk. So it could go either way.
With the Fed itself uncertain, it is difficult for investors to have strong convictions on how the growth/inflation story will play out. There are times when you have to wait out uncertainty and not move until the market clearly shows its hand or economic data clearly points to one outcome. This is one of them.
The uncertainty over the Fed’s statement is reflected in reaction articles written by commentators, shown below (with the BUTS added):
The Financial Time’s Lex Column:
With the Fed keeping its options open, investors are plunged back into uncertainty as they await the September and October meetings. There clearly remains a risk that inflationary pressure will continue to build through the second half. That could leave the Fed’s view that a soft landing on growth will be enough to reduce inflationary pressures over the next few years looking increasingly like wishful thinking … BUT … the fact that the Fed has paused now, rather than taking out more insurance against risking inflation, signals a greater focus on the downside risks to growth.
The Fed finally gave the market the event that has caused the optimists to buy stocks intermittently for almost a year or so …a pause in the interest rate hiking campaign … BUT … The beauty of the accompanying Fed statement is that it also contained something for the inflation hawks.
Bloomberg’s Caroline Baum:
There was nothing in the statement to suggest the Fed was calling a halt in its campaign to normalise the federal funds rate, which was at 1 per cent in June 2004 … BUT … that’s how events are likely to play out. Why? The behaviour of certain economic indicators — not on a one-month basis but over a longer period — suggests that the 425 basis points of interest rate increases are starting to bite.
Bloomberg’s John M. Berry:
… the Fed isn’t necessarily done … BUT … it was pretty clear from other parts of the statement that a majority of the committee thinks slower growth and the lagged effect of previous rate increases will do the job.
This entry was posted on Wednesday, August 9th, 2006 at 6:40 pm and is filed under Market direction. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.
