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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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December 14, 2006


The Disappearing Disagreement

Greg Ip and Christopher Conkey write in today's Wall Street Journal (page A1 of the print edition):

The case for optimism was bolstered yesterday when the Commerce Department said retail sales rose 1% in November from October, much more than economists had expected. Bond yields jumped sharply, as investors reassessed their view that the Fed would have to slash short-term rates to protect the economy against recession. That could be an early signal that the divide between the pessimistic outlook of the bond market and the Fed's more upbeat economic assessment is beginning to narrow.

In fact, that divide has been on the wane for a couple of weeks now, at least according to the Cleveland Fed's estimates of how options on federal funds futures are pricing the probability of a rate cut by March:

   

March_06

   

This doesn't imply, of course, that market participants buy what are perceived to be the forecasts animating US central bankers.  In fact, the Ip-Conkey article begins with this skeptical note:

New home construction is plummeting. Car sales are weakening. Investors have driven long-term interest rates well below the short-term rates set by the Federal Reserve. All these factors are present today, and all have been precursors of past recessions.

Nonetheless, those with their money on the line don't seem convinced that things will be bad enough to force the FOMC's hand any time soon.

UPDATE: Calculated Risk explores the "this time will be different" theme. 

December 14, 2006 in Federal Reserve and Monetary Policy | Permalink

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Comments

"those with their money on the line don't seem convinced that things will be bad enough to force the FOMC's hand any time soon."
I haven't heard anyone question the effects of the enormity of our liquidity these days but these funds have to be placed somewhere - two year yields are evidence to this.
If we're resolved to looking to the futures market for leadership, is the data as confirming a year out? 10 year yields are about 64 basis points BELOW current Fed Funds rate of 5.25%, so on a ten year bet, a year seems pretty "soon" to me.

Posted by: bailey | December 15, 2006 at 08:36 AM

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