Economists React to Fed




More good stuff courtesy of the WSJ (online only). The online version’s offerings continues to be a terrific yet overlooked resource for investors.


The Federal Reserve’s decision to increase its key lending-rate target by a quarter of a percentage point was widely expected on Wall Street. Here’s what some economists had to say about the Fed’s move and what to expect for interest rates going forward:

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The FOMC’s game plan to raise the interest rate at a "measured" pace has been working. The economy is in a self-sustaining mode. Despite the earlier surge in energy costs, the core inflation rate is within the range of price stability. Nevertheless, the central bank believes inflation could be a problem later. … The FOMC wants to position itself to combat inflation if necessary. This is the reason for reducing accommodation by mopping up excess liquidity.
— Sung Wohn Sohn, Wells Fargo

There is little incentive for policymakers to alter their message at this point. As a result, the three key aspects of the statement that might be used to send a signal to the markets — the "accommodative" phrase, the formal growth/inflation risk assessment, and the "measured" language — were all left unaltered. We expect rate hikes at each of the next two meetings — on February 2 and March 22. At this point, the market is just about fully priced for such a policy path.
— David Greenlaw, Morgan Stanley

We do not expect the Fed to pause any time soon, nor do we expect them to step up the pace of rate hikes until core PCE inflation moves above 2%. The Fed is to be applauded for the acceleration of the release of the minutes which should prove to be a valuable communication tool for the market.
— John Ryding, Conrad DeQuadros, and Elena Volovelsky, of Bear Stearns

As in November, the Fed says the economy is expanding at a "moderate pace despite the earlier rise in energy prices." Note "earlier" is new in this statement, an acknowledgment that the recent move in prices has been downwards but perhaps also hinting that the full impact of the summer/fall increase might not yet be in the data. In the labor market, the situation continues "to improve gradually."
— Ian Shepherdson, High Frequency Economics

All of this is consistent with the notion that the FOMC continues to believe that it will be able to tighten at a "measured" pace. However, this will be dependent on evidence that the economy continues to grow at an adequate rate, and that there are no significant surprises (either to the upside or the downside) on the core inflation front.
— Joshua Shapiro, Maria Fiorini Ramirez Inc.

While the FOMC’s next move is likely to be "data dependent," today’s policy statement seems to predispose the FOMC toward action rather than a "pause."  If they are pondering a "pause," or alternatively a bolder move, Fed officials will probably want to communicate such a shift through public statements or well-placed press conduits. For now, it looks most likely that the FOMC plans to continue adjusting the funds rate at the "measured pace" of 25 basis points at each meeting.
— David Resler, Nomura Securities International

With the Fed signaling its intention to continue raising rates, bond investors really should start taking note. Longer-term rates are way too low if the Fed is indeed headed back to a neutral level. Since I believe that rate is in the 4% to 4.5% range, the current 4.15% 10-year yield is not sustainable. Mid- and long-term rates will have to move upward to reflect the trend in short-term rates.
— Joel L. Naroff, Naroff Economic Advisors


Economists React
Tim Annett
WSJ, December 14, 2004 3:16 p.m.,,SB110305418929299916,00.html

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