Fed bets for Tuesday's meeting

[swag]

The Fed meets Tuesday to decide on short-term interest rates. The futures markets have put odds against a rate hike at the August meeting, calling chances almost three-to-one that the Fed will pause after 17 rate hikes and leave their target rate at 5.25%. Some economists and fed watchers agree with the pause scenario though others are not so sure.

I think the Fed will pause at 5.25% and more or less declare risks of inflation balanced with those of an economic slowdown, while continuing to maintain, via its bias statement, that future rate decisions will be governed by economic conditions and data.

[fasttense]

1. Did you see the drop in the dollar?

Without the interest rate hikes the dollar will continue to fall. I'm not so sure the Fed can afford to have the dollar's value plummet.

[LSK]

6. good point

[swag]

8. Interesting, but the dollar's value isn't really the Fed's chief concern,

though it would be a concern in the event of a run, as Janet Yellen indicated in a June speech.

Anyway, foreign central banks were still buying plenty of US assets when short-term rates were much closer to zero. But Treasury securities at the short end of the curve weren't among their primary investments. At the long end of the curve, yields have steepened enough to retain some interest and avoid a sell-off (indeed, 10 year notes had a strong rally last week).

And the Fed doesn't hold the only interest rate lever or the only dollar value lever. It's not even the only central bank in the world.

The dollar has been rattling around between $1.20/euro and $1.30/euro for a couple years now. It may pop $1.30 soon and slide down toward $1.40. My sense is that any such slide would be gradual and buffered by a number of other factors, one of those being that other nations don't want to break the back of their best customer. If there were a run on the dollar, the Fed would act, probably initially with a 50 bps inter-meeting rate increase. But I don't think there's going to be a run on the dollar.

Anyway, I doubt that the dollar will be among the Fed's chief concerns tomorrow, when it pauses at 5.25%.

[skids]

10. Au contraire -- the value of the dollar is their concern.

When the dollar tanks, the stock market quickly revalues to adjust for it. That is stocks "go up" and all the people on Wall Street wave their hands and talk about all the ponies they can buy, even though the price of ponies just went up.

Now if they do not raise rates there will be a bit of a negative feedback into that because some investors read that to mean the economy has been slowed. That would usually be dwarfed by the revaluation, but if it comes as it does on a bad jobs report and a bad housing report, they might run the risk of not getting the fake stock market "bounce" they want out of it.

I guess it depends on what they figure the magnitude of that feedback will be.

My prediction, for what it's worth which isn't much, a wild-ass guess really, is that they will not pause and keep the dollar high. They will wait for the bad jobs report to fade in everyone's mind, and pause right before the election so their buddies in the Republican party can point to a "soaring" stock market.

[swag]

11. Great. So your bet is 5.5% tomorrow?

[skids]

17. A weak bet, yes...

It's hard to tell what goes on in their heads. Could go either way, but I think the odds are higher that the rate will go up than everyone is betting.

[skids]

21. Looks like they decided it was worth the risk...

...well, this could get interesting, then. I'm not sure I'm happy or not about being wrong here. Initial market reaction is down, as expected, and we'll see how their gamble pays off as the forex dust settles and stocks revalue.

[Nickster]

2. I'm betting that they raise the rates. We need to keep that interest

rate climbing so that our debt continues to look appealing to foreign investors.

[ThomWV]

3. Pipedream: It'll go up 1/4 %. You Just Watch.

Up a quarter, no doubt about it.

On Edit: Typo

[swag]

5. Thanks for you bet, ThomWV.

I'll be there, 11:15 Pacific, tomorrow morning.

[Sammy Pepys]

20. Or not....

UNCH

[swag]

4. Kick for more bets.

[LSK]

7. ok, I say it goes up again.

[swag]

9. What a great thread.

[Richard Steele]

12. My bet: Politics trumps Reason; no change tomorrow.

[swag]

13. You won't forgive me for finding that a bit glib, will you?

[Richard Steele]

14. Is that a typo?

Anyway, there's nothing to forgive, because it was totally "glib".
It's really just a BET (aka "a guess"), not any sort of informed opinion.

[swag]

15. Very good, then.

Let the cartoons begin!

[swag]

16. The drop in productivity growth and increase in wage pressures complicates

things

http://www.bloomberg.com/apps/news?pid=20601087&sid=adRbdkmbuF4U&refer=home

But I still think they'll pause.

[swag]

18. Kick

[Sammy Pepys]

19. I think they'll pause, but....

...leave the door open for futher hikes.

[swag]

22. As noted elsewhere, they held at 5.25% and kept the key statement

unchanged from the last meeting:



" . . . the Committee judges that some inflation risks remain. The extent and timing of any additional firming that may be needed to address these risks will depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information."

See you next time. Thanks for playing.