So much for “One and Done”

So much for "One and Done."

In raising rates the expected 1/4 point, the Fed announced that they are likely to keep increasing short term rates for the next few meetings.

They threw a little bit of a head fake in there, noting "Economic growth has rebounded strongly in the current quarter
but appears likely to moderate to a more sustainable pace."

Trader’s who left their feet on that were disappointed.

By itself, that statement might have been a sign that the Fed was all but finished — which would have been the fuel sending the Bulls racing to new heights.  A moderating economy on a glide path to a soft landing would not require additional monetary tightening.

But as George Mason taught UConn, you have to play to the end of the game. In FOMC terms, that means reading to the end of the statement, where they shifted their focus to energy prices, noting the "potential to add to inflation pressures:"

"As yet, the run-up in the prices of energy and other commodities appears to have
had only a modest effect on core inflation, ongoing productivity gains have
helped to hold the growth of unit labor costs in check, and inflation
expectations remain contained. Still, possible increases in resource
utilization, in combination with the elevated prices of energy and other
commodities, have the potential to add to inflation pressures."

Like the Huskies, the "One and Done" squad is now firmly eliminated from contention. Better luck next year.

FOMC statement
March 28, 2006

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Discussions found on the web:
  1. Lyon commented on Mar 28

    what happened to the Kaiser Soce’s of Fed watching?

  2. B commented on Mar 28

    Citi’s move from sell to buy on copper related stocks yesterday was brilliant. The Fed is focused on the CRB abating. How can they not? Every stinking commodity is or was up hundreds to thousands of percent this cycle. From OJ to palladium to sugar to copper to coffee to platinum to corn to crude. If it were just oil as the savants in the press lead us to believe, the Fed would likely be done. Because if that were the case, we might simply be looking at a new global price for oil based on noninflationary factors. Copper stocks, and not the ones of equity form, are rising and copper is at the top of a blow off not seen in over 100 years. Copper stockpiles will continue to rise as the global construction boom seen in every economy slows due to higher interest rates in every economy. It’s called “new math”. 2+2=4. Now we even find out China MIGHT be attempting to manipulating the copper markets because their stockpiles were hugemongous and they wanted to liquidate them at high prices?? It’s good to know Wall Street has some kindred company in China in the ethics game.

    Of course, looking at Citi’s historical research calls tends to lead one to a conclusion they are the most dense person at the party. How can you be in the biggest global liquidity boom with the lowest global interest rates in forty years while economies of all sorts are moving towards capitalism and be “hold” or “sell” on copper stocks (the equity ones) the whole cycle? Now, likely at or near the very peak they go long? People pay for this sh*t? That’s as bad as McKeon’s January call over at Prudential for 100% equity exposure.

    The reality is Wall Street is no different than any other industry and the people who work there are no different. The old 80-20 rule applies to everything in life. On Wall Street there are 80% who float along with the good graces of a generally rising equities market that ensures they have always found a home and 20% who get it just like in any other profession. So, while 80% have pontificated since 3.5% that the Fed was done the next rate hike, a few understood for over a year and were calling for 5.0-5.5% or more before it was done.

    Bonds yields are now up almost 20% from the October rally low, PEs are astronomical on speculative stocks and S&P dividend yields are near the low end of a 100 year historical average. So, is this the start of a new bull run? Even if the Fed were done? Sure looks to be.

  3. GRL commented on Mar 28

    It is interesting to note that “inflation expectations” now are merely “contained” and not “well-contained.”

  4. Michael C. commented on Mar 28

    Not sure why any bull would be in the “one and done” crowd.

    Historically, the market does quite well when rates are rising contrary to popular belief.

    With P/E ratios so high, some Fed Models will issue sell signals once the Fed is done raising rates.

  5. Bynocerus commented on Mar 28

    B said:

    “So, is this the start of a new bull run? Even if the Fed were done? Sure looks to be.”

    I’m a little slow on the uptake; are you saying the Fed looks to be done or that this looks to be the start of a new bull run?

    In the back of my mind, I’ve wondered if there’s going to be an “oh shit the fed has really gone too far now” moment and we get a replay of 1987. I don’t know that the Fed will be done @ 5%, but it seems like the higher rates go the more likely a cascading selloff becomes.

    I know the Fed is well below historic neutrality, but the recovery has been completely dependent on low rates. Had rates stayed anywhere within the “normal” range, we would have experienced a pretty fugly recession. The longer we hold off on paying the piper, the uglier and longer the eventual recession will be. I almost hope the Fed has already gone too far, that way we can take a few tylenol now instead of later when hospitalization may be required.

  6. Marc Shivers commented on Mar 28

    I think the tone of the statement is just hawk reputation building. Bernanke gets to temporarily calm the chorus of dove pointers, while still leaving himself a data-dependent way out for the next meeting.

  7. GRL commented on Mar 28

    Wayne Angel was on CNBC today, and he made two basic points:
    (a) There is no benchmark for knowing when the fed is going to stop raising rates. “They are moving around in a dark room” (my paraphrase), and they are going to keep raising in quarters until something bad happens.
    (b) Greenspan started worrying about the trade deficit about a year or so ago, and that is what is driving the rate increases, not expectations for inflation.

    Then, you’ve got the Bank of Japan having ended quantitative easing. As all the pension money the Japanese have invested abroad over the last decade starts to flow back to Japan, that is going to cause the yen to appreciate against the dollar (so says Stratfor).

    Then you’ve got China talking about currency reform, as in a more market-driven value on the yaun, which means fewer treasurys will be bought.

    Oh, and GM is halted, pending news about GMAC financial restatements. (That should put a dent in the stock’s (and the Dow’s) recent rally.)

  8. B commented on Mar 28

    Apologize. Being sarcastic. Recent headlines in NYT. I suppose I was asking you to read my mind. :)

  9. alex commented on Mar 28

    a fairly balanced fed comment actualy – leaves all options well balanced on the table. nobody knows what bernarke and his crew will do next. keep an eye on the real estate market. if nothing dramatic happens we will see one more step at least. more important than the level of the interest rate in abolsute terms is the relative difference to euro and yen rates. that is where in my opinion all the analysis based on (simple) historic data is not really reliable because it forgets to take into consideration the relative position the different financial markets are in. the institutions managing economic development are still extremly uncoordinated. markets are by its nature much better connected. we should use those mechanism to innovate some new insitutional arrangements. and use them for a more sophisticated economic development approach. it’s kind of crude when I see how we try to steer the econonomy and try to find some light as we crawl along the walls of the cave…

  10. alex commented on Mar 28

    From Bloomberg Media Service:

    Economists including former Fed governor Lyle Gramley said the Fed’s statement suggests the central bank may not raise its main rate many more times.

    “It raises the odds that the end is near because of the statement that growth appears likely to moderate to a more sustainable pace,” said Gramley, who is now senior economic adviser at Stanford Washington Research Group in Washington. “It gives a hint that was not in the previous release. They hadn’t been quite that specific about the outlook for the economy.”

    Fed officials aren’t ignoring the effects of past rate increases on the economy. Earlier this month, San Francisco Fed President Janet Yellen said she’s “sensitive” to signs the central bank may “overshoot” by raising interest rates too much.

  11. GRL commented on Mar 28

    Changes to the first paragraph:

    Although recent economic data have been uneven, the expansion in economic activity appears solid.
    from the January statement has morphed into:
    The slowing of the growth of real GDP in the fourth quarter of 2005 seems largely to have reflected temporary or special factors. Economic growth has rebounded strongly in the current quarter but appears likely to moderate to a more sustainable pace.

    I interpret this to mean that the fed views recent signs of weakness as temporary, and if, as expected, economic growth moderates in the future, then the fed might pause. If not, then they will keep raising.

    The statement
    “Core inflation has stayed relatively low in recent months and longer-term inflation expectations remain contained.”
    from the January statement has been replaced by
    “As yet, the run-up in the prices of energy and other commodities appears to have had only a modest effect on core inflation, ongoing productivity gains have helped to hold the growth of unit labor costs in check, and inflation expectations remain contained.”

    I interpret this to mean that, “as yet,” higher commodity prices, declining productivity gains and unit labor costs have not worked their way into inflation, but they might (in fact, given recent statistical trends in these areas, probably will) do so in the future.

    Note also that, on August 9, 2005, “longer-term inflation expectations remain[ed] well contained,” whereas, now, “inflation expectations” are merely “contained.”

    As I see it, they left in place all of the hawkish parts of the January statement, and the dovish parts of earlier statements have become more hawkish.

    How does 6% by the end of ‘06 strike you?

  12. john commented on Mar 28

    Nothing to see here – move along. I loaded up at 3:50 this afternoon. Tomorrow I’ll reap the rewards. Talk about your one day stories.

    6% will totally destroy the economy. You can’t beat rising commodity prices with rising interest rates. There – somebody had to say it so I did. The only thing rising commodity prices can possibly do is make wages rise. Regardless of the fairy tale about “benign” inflation – everything is going up. That is because everything travels by truck and the trucks ain’t going to run unless the oil bill is paid – in advance.

    Only the most dumbest-ass dog on the darkest night would believe that you can manage a fiat-based economy with interest rates. That is so f-ing insane it almost defies comment.

  13. alex commented on Mar 28

    the question should be is 6% Or whatever the rate should be) the right level or not? 96% of the guesswork is kind of wasted energy because it doesn’t adress the right question. and everybody who tells me we cannot know the answer should think how we (or the feds for us) could make better informed decisions. isn’t it annoying that we don’t know and people tell us we are not supposed to know. we need a new era of enlightment here. i bet we could know better if we would launch some smart new insitutions that would gather the information in the economy and would than discuss the scenarios and possible outcomes and move forward adjusting the rates and other economic conditions. we could start locally and try if we could do better…

  14. Daniel Secrest commented on Mar 28

    I think the Fed is overshooting. This is actually a good thing…

  15. alex commented on Mar 28

    The Fed is worried about the housing market, period. Their traditional bogeyman, inflation expectations as a result of wage inflation, is nowhere to be seen, courtesy of global labor arbitrage.

    Inflation concerns are a smokescreen. The Fed knows how much debt is in the system, and how fucked up the fiscal policies of the Bush Administration are, and how much China doesn’t want to keep eating our bonds, and how many risky ARM/IO mortgages have been taken over the last four years. They are going to tighten and keep at it until they have a couple of quarters’ evidence that the housing market is REALLY rolling over. The higher they get, the more bullets they have to lower in 2007 if the housing-downturn induced recession gets bad.

    In other words, they are pricking the housing/credit bubble, and hoping that the rest of the global economy remains strong. However–they also know how much the whole damn enchilada is leveraged to the (over-leveraged) US Consumer. They are probably happy with the housing data coming out now–less ARMs, lower sales, slower price appreciation. They just don’t know how far they have to go…

  16. anon commented on Mar 28

    Barry is quick to call the one-and-done crowd as “eliminated”. This might be due to Barry’s forecast for the DJIA by end-of-year 2006. Barry: still stand by the forecast? around 7,000 for the DJIA by year end?

  17. Barry Ritholtz commented on Mar 29

    Still looking for a hefty correction of 25% or so in the S&P . . .

  18. Michael C. commented on Mar 29

    >>>The Fed is worried about the housing market, period. <<< They made little to no mention of it in yesterday's meeting. Guess we'll know more when the minutes are released.

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