Friday, June 30, 2006

Will the Fed "pause" in August? Yes.

As all sane people had expected, the Fed hiked their fed funds target interest rate by a quarter-point to 5.25% on Thursday. The great uncertainty remains what the Fed will or won't do in August. A lot of people acted quite surprised on Thursday. Some had expected a half-point hike and many had expected that the Fed would "signal" that a hike was more likely in August. The Fed took the wind out of the sails of both of those camps, without actually "signalling" that a pause was a high probability for August. The Fed essentially said "maybe, maybe not", depending of course on the data. My forcast is that inflation will moderate a bit over the next month and permit the Fed to commit to at least a temporary pause as the past hikes work their way through the economy.

Personally, Id like to see another hike to pump up the yield on all the cash that I've accumulated in the past month for my rainy day fund.

Fed fund futures point to 5.50% in August, but enough of that is likely simply a hedge so that we can't be sure how many people are really betting on that outcome. Besides these hedges and bets can shift rather quickly, even overnight.

BTW, Fed Chairman Bernanke is doing a great job and doesn't get enough of the credit that he truly deserves. The economy continues to poke along, neither booming nor busting, and that's what Bernanke's charter is at this stage. Inflation is high enough to cause the Fed to want to push it down a bit, but not so high as to cause any great harm or be a great risk.

-- Jack Krupansky


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