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September 18, 2004
Will they?
The Federal Open Market Committee meets Tuesday on whether or not to raise (lowering is pretty much out of the question) the fed funds target. Smart money is on a 25 basis point increase. Holding steady at this point might be taken by the market as a negative signal. The Fed is often accused of juicing the economy before an election, but ironically, this time a more accommodative policy probably wouldn't have the desired effect. Expectations matter a lot these days. Alan Greenspan has been instrumental in making the Fed more transparent, and it has made the market a lot better at predicting the Fed's actions. On balance, that's a good thing, but it does add a constraint to their decision making process. Leaving rates alone would raise a lot of questions in the market.
The question is, where do rates go after Tuesday? Consumer confidence is slipping. Clearly the Fed would like to get rates up to a more appropriate level over the next year, but they won't want to risk slowing things down too much too fast. Right now, I would expect that the meeting after next might give us pause in the action. But even so, I don't see any reason why they won't stay the course towards a fed funds rate of 3 to 4% in the next 12 to 18 months. Look in the press release for indications of where they might be going on November 10.
And by that next meeting we'll know who the next president will be.
We hope.
Posted by William Polley at September 18, 2004 12:09 AM