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