Thursday, June 29, 2006

Quarter-point Fed rate hike still likely followed by a "pause"

Some people still feel that the Fed might hike by a half-point at today's FOMC meeting, but I feel that a quarter-point is a virual certainty. I also feel that the Fed will in fact pause after this hike, although it might be a temporary pause pending the evolution of the economy. Fed funds futures are still predicting anoher quarter-point hike to 5.50% in August, but that may be more of an insurance hedge than an outright bet.

There may be a lot of sentiment that a hike in August is "likely to be needed", but my feeling is that the data will probably unfold in a manner that incrementally gives the Fed more confidence to stand pat by the time the August FOMC meeting unfolds. Also keep in mind that we now have 4.0% of hikes whose effects have yet to fully unfold.

The no-brainer Fed move at this point would be for the Fed to explicitly pause after the hike to 5.25% with the caveat that hikes will continue if inflation doesn't taper down by the end of the year.

-- Jack Krupansky


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