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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June 30, 2006

Post-FOMC Market Update

The pudding, from the Financial Times..

“Traders probably sense from the statement that the Fed is proceeding cautiously, even reluctantly, in terms of future tightening,” said Alan Ruskin, strategist at RBS Greenwich Capital. “It seems like it may have caught the market off guard.”

Futures traders priced in a reduced probability of an August rate rise – still about 65 per cent cent, but down from about 90 per cent the day before.

... along with some more proof in pictures:




That change is not quite as dramatic as the numbers quoted from the Financial Times -- a result of using options rather than futures alone in the calculations of the probabilities -- but the story remains more or less the same. The details and data will be available later this morning on the Cleveland Fed website, where you will also find the first hint of what the market thinks September will bring:



UPDATE: Meanwhile, in the global blogger village: The Capital Spectator observes that the decision was "a surprise to no one", but the statement was "anything but routine."  (CS also digs up an analyst willing to muse "If we get a bad consumer price index report, for instance, the Fed might do something the next day".) The Nattering Naybob reads the statement as "status quo" (and puts the decision in the broader context of the day's news, as does The Skeptical Speculator.) But The Prudent Investor is not buying the dove interpretation.  William Polley thinks "another one or two quarter point steps are probably in the cards." Hypothetical Bias reminds us that "the Fed has a history of overdoing tightening regimes" and suggests that to "demonstrate his inflation-fighting credentials, Bernanke may continue this pattern." A full parsing of the Committe' statement is available at Economist's View and at The Mess That Greenspan Made.

The New Economist has some links that I missed.

Sort of related: Contango has an interesting panel of Morgan Stanley economists discussing whether monetary policy has defnitely turned restrictive. (Answer: Yes.)  Greg Mankiw relays (with some skepticism) an attempt to resurrect the reputation of Arthur Burns.

UPDATE II: Michael Shedlock has many thoughts, all of which lead to the conclusion that "the recession of 2007 is looming ever larger."

June 30, 2006 in Fed Funds Futures , Federal Reserve and Monetary Policy | Permalink


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Nice link to Contango, thanks. While you can add my name to those disbelieving (disdaining) our monetary aggregates, I'm not yet convinced our monetary policy's turned restrictive.
Prudentbear's Doug Noland posts an excerpt from a Kathleen Hays/Henry Kaufman interview in which HK questions wisdom of Fed's transparancy:
"the tendency for the Federal Reserve in recent years is to pursue two approaches: measured response and transparency .... That does not give you control over Credit creation. In the new financial markets ... when you tell an investment banking firm - a commercial banking firm – that it’s 25 basis points, there are many people who will analytically tell you what the risks are in the market along the interest-rate curve or in other Credit instruments, and will take the opportunity to leverage those positions and extend Credit."
In CA, free money's there for the taking, r.e. brokers are STILL hawking 0%int., 0 down mtgs, I'm beseiged daily with low/no interest (on balance transfer & purchases) credit card offerings, just a few days ago GM announced plans to reinstate its 0% interest auto buying program & durable goods retail stores are offering 0% interest out to 2008. Although anecdotal, these are hardly signs of a restrictive credit environment. I'd like to hear an Economist's thoughts about Kaufman's comments.

Posted by: bailey | June 30, 2006 at 10:13 AM

bailey -- I can't really give you an intelligent answer, because I don't really understand what Kaufmann has in mind. At the end of the day, the FOMC's control over credit extension is limited to its provision of reserves to the banking system. it is certainly true that a slower trajectory of rate increases will mean less restraint on reserfe creation than otherwise. But there is always a question of whether that represents the slow adjustment of the economy, or a slow adjustment of policy. Those two circumstances have very different imolications. Perhaps Mr. Kaufmann has something like "front-running" in mind -- that is, the tendency of credit providers to act speculatively (or not so speculatively) in front of expected rate changes. That certainly happens, but again this is limited to how the Desk decides to manage reserve postions.

Posted by: Dave Altig | July 01, 2006 at 09:35 AM

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