Two weeks ago, with Hurricane Katrina's devastation still fresh in everyone's minds, I wrote that while it was "not an easy call" I expected the FOMC to raise the Fed funds rate by another 25 basis points today to 3.75%. Nothing that has occured in the past fortnight has changed my mind. The Fed should hike rates today. For those wanting reasons, I give four inflation-related factors:
1) real Fed funds are still below their neutral level - that is, they remain stimulative
2) to that stimulus add the prospect of Federal fiscal profligacy
3) then add continuing high oil prices, evan after the post-Katrina spike fades
4) and Friday's jump in consumer inflationary expectations.
There is of course another way of deciding the issue - looking at market expectations. The Federal Reserve generally tries to avoid surprising markets when on an upward or downward rate path. That would anger traders, confuse markets and undermine the Fed's credibility. So what do markets think?
5) Dave Altig shows the Fed funds futures contracts' implied probability point to a September rate hike (though the November meeting's outcome is less clear-cut).
6) Likewise the latest market surveys show almost all primary dealers and US market economists looking for a 25 bp move today.
Finally, renowned Bloomberg columnist John Berry has written that the Fed Will Raise Rates and Indicate More to Come:
No one, including Fed officials, knows how high the overnight rate target eventually will go. It's very likely that the responses in the marketplace and in the halls of government to Katrina will make that point higher than it otherwise would have been.
UPDATE: As expected, the FOMC raised official US rates to 3.75%. Their press release argues the impact of Hurricane Katrina wlll be felt near-term but "not pose a more persistent threat":
Output appeared poised to continue growing at a good pace before the tragic toll of Hurricane Katrina. The widespread devastation in the Gulf region, the associated dislocation of economic activity, and the boost to energy prices imply that spending, production, and employment will be set back in the near term. In addition to elevating premiums for some energy products, the disruption to the production and refining infrastructure may add to energy price volatility.
While these unfortunate developments have increased uncertainty about near-term economic performance, it is the Committee's view that they do not pose a more persistent threat. Rather, monetary policy accommodation, coupled with robust underlying growth in productivity, is providing ongoing support to economic activity.
The rest of the statement does not differ markedly from previous ones. They still see monetary policy as accommodative, with the usual reference to a "measured" pace of rate increases. Mark Thoma helpfully summarises the main points, while William Polley draws attention to the first dissenting vote in years:
Voting against was Mark W. Olson, who preferred no change in the federal funds rate target at this meeting.
That will attract some press attention.
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