Terry Connelly is dean of the Ageno School of Business at Golden Gate University and is frequently quoted on business, financial, and economic issues by Bay Area local, as well as national, news media.
I believe the Fed meeting will seem a lot like the most recent one: (1) rates — no change; (2) statement – hyper-vigilance on inflation; no bottom yet on housing; hyper-uncertainly on the economy; (3) votes – one, or more, dissents on the hawkish side.
(1) Despite the continued inflation alerts sounded by certain Board members and even the Chair himself, a Fed which just yesterday cited “continued fragile circumstances in financial markets” in extending its special liquidity credit lines for investment banks and primary dealers is not yet positioned to raise the funds rate. Driving with both the accelerator and brake depressed is occasionally warranted and may yet happen down the road, but it can be very confusing for an especially nervous driver following behind! And with the condition of the economy at best moving from pneumonia to anemia, it is not yet time to prescribe a sedative. That said, the inflation risks (and dollar concerns) rule out any cut now.
(2) While the Fed may cite some recent amelioration in forward energy prices, there is also evidence that materials costs are being passed forward in the supply chain (US Steel) which will demand a high degree of inflation vigilance. On housing, they may cite the new financial “stimulus package” for Freddie, Fannie and the foreclosed, but that relief will hardly be immediate, and there is no call yet to call a housing bottom from the Fed’s point of view, especially with another round of mortgage resets coming in the autumn. Moreover, this week’s Treasury promotion of “covered” housing bond issues (where the mortgages stay on the issuers’ balance sheets) only serves to advertise that the securitization market as we knew it remains comatose. Finally, a Fed which no doubt remembers that just a year ago it had to change policy course within about 10 days of its August meeting has clearly learned the value of emphasizing ” uncertainty” in its statements about the economic outlook.
(3) Even with all their turmoil, the financial markets have seemed to show little concern about the fact Bernanke is presiding over a divided Fed on rate policy. Perhaps this is because both markets and even the Chairman himself recognize that the dissents by the inflation hawks serve the Chairman’s policy purposes by keeping the dollar bears somewhat at bay and inflation expectations marginally contained. Hawkish talk and minority votes are a lower risk alternative to rate hikes that could look premature in hindsight heightened by election fever. And if markets are really worried about possible rate increases,holding steady can seem like a cut!
