Everyone seems to be all abuzz about a Robert Novak column in today’s Washington Post.
"Speculation that the Federal Reserve is about to begin inflation-fighting interest rate increases appears to be dead wrong. Fed Chairman Ben S. Bernanke is worried more about runaway oil prices contracting the global economy than inflating it through a wage-cost spiral. According to sources close to him, America’s leading central banker has no plans for a raise."
I don’t expect Fed hikes anytime soon, but it has nothing whatsoever to do with Novak’s column. In fact, so far, Novak is a perfect contrary indicator when it comes to the Fed. His column back in August 16, 2007 was titled "A Rate Cut on Hold."
The very next day, the Fed cut the rate at the discount window 50 bps, beginning an easing cycle that took Fed Funds and Discount rates down to 2% from 5.25%.
Fed Funds Rate On Hold? Not Exactly…
click for ginormous chart
Let me frame the question differently — Novak’s "A Rate Cut on Hold" article out in August — the day before the discount rate cut, and a few weeks before the September meeting, where the FOMC cut 50 bps.
Novak’s source is rumored to have been "Calamity Bill" Poole, the the St. Louis Fed president, who declared that only a "calamity" could make the Fed ease — exactly one day before the discount rate cut on Aug. 16.
UPDATE II JUNE 17 2008: 2:41pm
We mentioned that in response to the WSJ and FT articles on the FOMC, fed funds futures had reduced expectations of
a 50 bps hike by Oct to 28% from 60% yesterday.
Right now, those odds are down to
14%. The odds of 25 bps hikes at each of the Aug and Sept meetings are down to
58% vs 70% this morning and from 98% yesterday.
UPDATE JUNE 17 2008: 6:42AM
Today’s WSJ column "Fed Mood Tilts Away From Rate Increase" is having an
impact: Yields are also down
across the yield curve.
The fed funds futures expectations for rate hikes are also being impacted: The odds of 25 bps hikes at the
August meeting is down to 70% from 98% yesterday, while September is off about the same amount. 50 bps are
still priced in by the Oct meeting, while the odds of a total of 75 bps by then are
down to 28% vs 60% priced in yesterday.
Attention Robert Novak: The Fed isn’t at Neutral (August 16, 2007)
The Fed’s Rates Dilemma
Robert D. Novak
Monday, June 16, 2008; Page A19
A Rate Cut on Hold
Robert D. Novak
Thursday, August 16, 2007; A15
Poole Says Only `Calamity’ Would Justify Rate Cut Now
Anthony Massucci and Kathleen Hays
Bloomberg, Aug. 16 2008