The Atlanta Fed's macroblog provides commentary and analysis on economic topics including monetary policy, macroeconomic developments, inflation, labor economics, and financial issues.

Authors for macroblog are Dave Altig, John Robertson, and other Atlanta Fed economists and researchers.

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August 08, 2005

Is The FOMC Falling Behind The Curve?

Today we hear from Bloomberg that some say the answer is yes indeed:

U.S. Treasury notes will extend their decline, pushing 10-year yields to the highest since March, on signs the Federal Reserve is falling behind in its fight to contain inflation, according to a survey of Wall Street's biggest bond-trading firms..

All the dealers expect policy makers to raise their interest- rate target for overnight loans between banks tomorrow to 3.50 percent from 3.25 percent. Twenty said the Fed will increase the so-called federal funds rate to at least 4 percent by year-end. A month ago, just 11 expected the rate to reach that level. By July, the rate will be at least 4.25 percent, 14 firms said.

Actual market bets -- captured from options on federal funds futures -- appear largely consistent with the survey responses reported in the Bloomberg article. One day in advance of the next meeting of the Federal Open Market Committee, estimates of where the federal funds rate will be in October remained roughly where they were last week -- suggesting another 50 basis points across the meeting tomorrow and the meeting scheduled for September 20.


The architects of these estimates always like to remind us that the trends in these pictures are more reliable than the exact probabilities, so the interesting observation is that the 50 basis point bet has failed to drift north, and this is due to a small but persistent probability being placed on a more aggressive trajectory.

A similar story shows up in the November probabilities: By far, the expectation appears to be that the Committee will just keep on keeping on with their "measured pace" of 25 basis point hikes at each meeting through November 1.  But, the sentiment in favor of a pause has been drifting down, in favor of a faster-than-measured pace.


Apparently, some bond-market players are not convinced that this is enough to contain inflation.  Again,from the Bloomberg piece:

Yields will rise "just on the mere fact that the Fed will be moving more than the market is currently pricing in,'' said Stephen Stanley, chief economist at RBS Greenwich Capital in Greenwich, Connecticut. "The inflation picture won't look as good'' as it has based on current economic growth, he said. RBS expects the 10-year Treasury to yield 5 percent, the highest since June 2002...

"Growth in the second half of the year and inflation will pick up modestly and that will keep the Fed moving rates higher at a measured pace,'' said Conrad DeQuadros, a senior economist in New York at Bear Stearns & Co.

There is much I would criticize in the commentary contained in the article -- an over reliance on the canard that economic growth must be inflationary, the belief that the monetary policy is focused on bursting bubbles in the housing market (which the Chairman has repeatedly denied), and a repeat of the notion that last Friday's wage report was bad news.  But here is the best reason to take all of this with a grain of salt:

Economists have been wrong about yields for the past two years as accelerating growth failed to spark faster inflation.

And, I think, James Hamilton would say we won't get that growth either if we aren't careful

Here's the data from the pictures above:

Download October.xls

Download November.xls

Download imp_pdf_slides_for_blog_080505.ppt

UPDATE: Mark Thoma reports has the Chicago Board of Trade estimates (which are, not surprisingly, consistent with ours)).  Professor Hamilton weighs inThe Capital Spectator has inflation concerns of his own.

August 8, 2005 in Fed Funds Futures , Federal Reserve and Monetary Policy | Permalink


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There is no subject that attracts greater interest among investors, homeowners, businessmen these days, yet you introduce the topic like your readers are freshly emerging from a Rip Van Winkle like nap. The question you ask leaves me wondering just how delicate a line a Fed employee must walk when running a blog. You're in a position where you can do a lot better with this one, so I ask you: what are your grandest hopes & objectives for this Blog?

Posted by: bailey | August 08, 2005 at 10:13 AM

bailey -- Interesting question, although if you read the "About" section I think I state clearly what I am up to. I started this blog as a way to have an ongoing conversation with my students at the University of Chicago -- past and present -- about economic news I am watching and, sometimes, how I and others are thinking about them. At the end of day, that is really the sole reason I run this thing.

I gather from your comment that you think I am coming up short on something you are looking for and worse yet, that I am insulting the intelligence of those who might stumble this way. I assure you I intend to do no such thing. So, I throw the question back to you: What would you like from me that I am not delivering?

Posted by: Dave Altig | August 08, 2005 at 11:11 AM

There is a big issue here in the upward revision in core PCE. Nobody in the blogosphere seems to have mentioned it, but there was a half point revision upwards over the entire past year because the BEA had made a programming error somewhere. That should have a pretty big effect on how the fed is thinking, and make them more likely to be aggressive in rate increases.

Posted by: Ian D-B | August 08, 2005 at 12:28 PM

Ian -- That was indeed an unpleasant surprise. However, I can't speak for anyone else, but it didn't change my thinking much, if at all, about the state of the inflationary outlook. I have been watching the median CPI, and it was suggesting all along that the underlying rate of inflation was higher than what was being suggested by the PCE, but that it has also stabilized. The recent release of the Dallas Fed trimmed PCE measure more or less confirmed this view (although that measure actually seems to be backing off). I guess we will see if my sentiments are shared by the Committee.

Posted by: Dave Altig | August 09, 2005 at 07:32 AM

Dave, My frustration is that to me, you've got the credentials, the position (prof, as well as Fed insider), & the obvious energy to push the Economic Blog. I'm looking for more of your recent int. rate exchange which ended approaching the philosophical - as good arguments often do).
For Instance, I'm sure you've been to umpteen Fed analyst meetings and can better speak to the shortcomings of our economic indicators than most. How could it not be frustrating for you to listen to "Economists", expanding upon premises based on data that's been just recently been adjusted downward a full percentage point. Where's the perspective? I'm not looking for an Economics Blogger to pontificate, I want to see him lay his bones bare to explore the
potential of the Web to improve his field of study.
Odds are, we're soon going to see a heightened discussion of inflation targeting. (I'm regularly hearing Mishkin's name these days). What will we choose to target inflation to: cpi, pce, m1, 2, 3, or x (I think all are +40%/the last 5 years). Or, should we factor in a radical new measure, say - FNMA's increase in it's conforming loan amount over the last three years?
The Boskin Commission hearings were preceded by numerous AG statements that the cpi was overstated, limiting the subsequent to, HOW MUCH should the cpi be REDUCED? The study of Economics is stuck in the MUD, it's singular value looking to this outsider like a stamp of credibility for absurd Government practices. I wrote because I read some of your work & hoped you'd play with the Blog to excite your students, to lay it all out there & have fun while exploring how the Blog can move the demand curve. If you're not familiar with her work, I really appreciate what Rebecca MacKinnon of rconversation has tried to do.
Please understand. I enjoy your Blog, but I want more - that's what Blogging's about. Have a great day.

Posted by: bailey | August 09, 2005 at 11:42 AM

It is always easy to start believing in the trend about the time the trend is over. The first 10 quarter points were about getting back to even. Are we now even, behind a little or ahead a little? The quarter point "measured pace" is just right to give time to see results. By October, it may be clear that 3.75% is a good place to pause. The oil price may take care of the next quarter.

Posted by: Jack K. Miller | August 10, 2005 at 02:01 PM

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