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January 03, 2006
Funds Rate Probabilities: Waiting For Another 50
From today's release of the minutes from the December 13, 2005 meeting of the federal Open Market Committee we learn this:
Committee members generally anticipated that policy would likely need to be firmed further going forward. In that process, the Committee would need to be mindful of the lags in the effect of policy firming on the economy... Views differed on how much further tightening might be required. Because the Committee's actions over the past eighteen months had significantly reduced the degree of monetary policy accommodation, members thought that the policy outlook was becoming considerably less certain and that policy decisions going forward would depend to an increased extent on the implications of incoming economic data for future growth and inflation.
Any uncertainty that FOMC participants are feeling was not registering, as of the end of last week, among participants in the market for options on federal funds futures. According to our usual Carlson-Craig-Melick estimates, another 25 basis points is the prohibitive favorite for the next meeting, and the sentiment for an additional 25 in March rose from the week before. The story, in pictures:
Of course it could be that this language from the minutes will have an impact:
The federal funds rate had been boosted substantially, and, in the view of some members, it was now likely within a broad range of values that might turn out to be consistent with output remaining close to potential. In these circumstances, the Committee thought that policy should no longer be characterized as accommodative... Although future action would depend on the incoming data, this characterization of the outlook for policy was seen by most members as indicating that, given the information now in hand, the number of additional firming steps required probably would not be large. Some members thought that the word "measured" was no longer necessary, but its retention for this meeting was seen as potentially useful to preclude a possible misinterpretation that the Committee now saw a significant possibility of adjusting policy in larger increments in the near future.
Or perhaps sentiment will shift with the weaker than expected report on manufacturing activity in December. Even so, the yield on the 10-year Treasury fell under 4.4 percent today. Unless something changes soon, the anticipated move at the next FOMC meeting means the yield curve will invert at the end of the month.
Things could always change, of course. Economists contributing to the last Blue Chip forecast report were, as of the December 10 publication date, anticipating policy will be "firmed further going forward." But they were also expecting some upward movement in long-term interest rates:
Bold predictions, those. You have to go back to the first half of 2002 to see 10-year rates at the levels suggested in those forecasts. I wonder -- what will finally make it so?
Big, big hat tip (and happy new year) to Erkin Sahinoz, dialing in these estimates from a slow machine in Istanbul.
UPDATE: William Polley reads the minutes to say "most of the heavy lifting is done." Mark Thoma says "the light at the end of the tunnel is getting brighter." Barry Ritholtz suggests the plan is "to only invert the yield curve somewhat." The Skeptical Spectator agrees that the manufacturing data makes a pause more likely.
January 3, 2006 | Permalink
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