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 31, 2005

Funds Rate Probabilities: Special Katrina Edition

Several people commented yesterday on the release of the minutes from the August 9 meeting of the Federal Open Market Committee.  The Prudent Investor highlighted the usual clause identifying the importance of intervening economic developments on the ultimate outcome on the funds rate. So did William Polley.  At Economist's View, Tim Duy takes a contrarian position and projects that "Minutes+Katrina = More Tightening."

Today, that looks contrarian indeed, as the horrific intervening economic development represented by Katrina appears to have softened the sentiment for future funds rate hikes, not so much for September but for November for sure.  Thanks to the ever alert Erkin Sahinoz, we have these estimates from the options on federal funds futures:




That was as of the market close yesterday.  We'll see how things develop over the week.

UPDATE: Professor Polley takes issue with Professor Duy.

August 31, 2005 in Fed Funds Futures , Federal Reserve and Monetary Policy | Permalink


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» Katrina and the probability of recession from William J. Polley
Kash returns from his hiatus and tries to discern the "animal spirits." He's worried. Even temporary problems can get magnified if they contribute to a broader change in psychology. And I think that the current situation contains the seeds for... [Read More]

Tracked on Aug 31, 2005 6:44:23 PM


First I want to kick of saying that everyone I know here in Europe is deeply concerned by what is happening in New Orleans, Louisiana, Missisipi and elsewhere. I am watching live streaming video from Jefferson Parish as I type. So from all my fellow bloggers on Afoe and me, we are thinking of you.

Now on the economic consequences I think you are certainly in the right ballpark. We may see moderate changes in the Fed response curve in the coming months.The kind of disaster scenarios that the Economist heading editor engaged in just aren't on the agenda.

But I also want to post here about something I feel - in a different way - just as strongly about: some of the ways which quotes from the Bob Hall paper are being used.

Angry bear - and Brad Delong repeats him here - totally distorts a short extract from Hall's paper in an absolutely scandalous way.


Now lets look at the full Hall quote:

"When asked to describe a particular recession or recessions in general, the practical macroeconomist will tell a story that focuses on the collapse of purchases of certain categories of products—producer and consumer durables. For example, all practical accounts of the recession of 2001 emphasize the huge decline in high-tech investment. In earlier recessions, declines in home-building were prominent features. On the other hand, more theoretically inclined macroeconomists tend to take a decline in productivity—or at least a pause in the normal growth of productivity—as the central driving force. New ideas discussed here may help bridge this important gap between practical and theoretical macroeconomists."

This is on page 41 of the paper in the Adobe acrobat reader. Now what Hall is doing - and I personally am neither for him nor against him - is contrasting two traditions, and saying he is going to try to bridge the gap between them. Nowhere - as far as I can see - does he argue that a decline in productivity was responsible for the 2001 recession.

Basic literacy rather than knowledge of economics would seem to be all you need here. So my response to Brad is 'huh'.

But then maybe I spend too much time in the gamma quadrant.

All of which is just my way of saying that I think you're taking a hell of a lot of unfair stick here. Keep it up, some of us are enjoying the read.

Posted by: Edward Hugh | August 31, 2005 at 01:10 PM

Edward -- Thanks. I can use all the help I can get.

Posted by: Dave Altig | August 31, 2005 at 05:06 PM

I think this time you've really missed what the market is pricing...

As of the close today.. market was unambiguously pricing in nearly 20-25% probability that the FED would pause at the September FOMC.

October 96.25 calls settled at 4 ticks. Simple arithmetic: FED pauses in September Oct FED Funds go to 96.50.. 4 ticks make 21.....
As close to 20% probability as you would like...

Take a look at our FFEP page on Bloomberg for live updating of the probabilities and their impact on the entire fixed income curve....

Posted by: sjonas | August 31, 2005 at 11:53 PM

As America's perhaps greatest natural disaster unfolds, coincidentally and, for the most part - unrelated, as demonstrated by recent equity valuation activity - so unfolds the second of three daily decay fractals that will make up the primary 2005 equivalent of the 1929 drop.
The first decay fractal had a base of 11 days. Wednesday 31 August was the 18th day of a 27 to 28 day second fractal sequence. The ideal expected secondary top of this fractal sequence will range from 1.62 x 11days or 18 days to 2 x 11 days or 22 days.

Smart money is flowing into the ten year notes and thirty year bonds just as the waters are naturally flowing into the low areas through the disrupted dikes. Even as equities rose yesterday there was an uncharacteristic abrupt divergent lowering of the long term US interest rates (as previously predicted) driving TNX sharply down to 40.20. Three month treasuries likewise were driven down but to a lesser extent with IRX at 34.30 on August 31, 2005. The spread of 6.9 is the smallest in over three years. The spread will most likely become temporarily negative within the next few months.

Just like in 1929 it will most likely be the third decay fractal of 27-28 days that will witness the profound drop that will be the equivalent of a very slow moving category 5 hurricane moving across the entire nation without benefit of a dissipating landfall. The civil and social chaos witnessed in New Orleans may well be a representative microcosm of the general unrest that could follow.
Gary Lammert The Economic Fractalist http://www.economicfractalist.com/

Posted by: gary lammert | September 01, 2005 at 07:22 AM

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