Political Economic Reasons Why The Fed Is On The Cusp Of Pausing

By: Paul Kasriel | Fri, Jul 1, 2005
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Although the consensus thinks it is a slam dunk that the Fed will raise the funds rate another 25 basis points when the FOMC convenes again on August 9, I don't. I am, however, willing to entertain that possibility. But let's not quibble over a quarter of a point. What I do believe is a slam dunk is that the Fed will pause in its rate hikes no later than right after August 9. Herewith are the reasons why I think the Fed is on the cusp of pausing.

Chart 1

Chart 2 shows that the spread between the yield on the Treasury 10-year note and fed funds rate target has narrowed to about 100 basis points as of Wednesday. With the 25 basis point increase in the fed funds rate target today, this spread has narrowed to about 75 basis points. The spread, unlike real M2 growth, is not currently signaling that a recession is imminent. It is, however, signaling that economic growth will be slowing going further. Although the Fed has pooh-poohed the reliability of the spread as a leading indicator, would the Fed want to tempt fate by pushing the funds rate above the Treasury 10-year yield? Wouldn't that open the Fed up to a lot of criticism inasmuch as it has been warned in recent months that the narrowing spread was conveying information that monetary policy was becoming restrictive?

Chart 2

Chart 3


Paul Kasriel

Author: Paul Kasriel

Paul L. Kasriel
Director of Economic Research
The Northern Trust Company
Economic Research Department
Positive Economic Commentary
"The economics of what is, rather than what you might like it to be."
50 South LaSalle Street, Chicago, Illinois 60675

Paul Kasriel

Paul joined the economic research unit of The Northern Trust Company in 1986 as Vice President and Economist, being named Senior Vice President and Director of Economic Research in 2000. His economic and interest rate forecasts are used both internally and by clients. The accuracy of the Economic Research Department's forecasts has consistently been highly-ranked in the Blue Chip survey of about 50 forecasters over the years. To that point, Paul received the prestigious 2006 Lawrence R. Klein Award for having the most accurate economic forecast among the Blue Chip survey participants for the years 2002 through 2005. The accuracy of Paul's 2008 economic forecast was ranked in the top five of The Wall Street Journal survey panel of economists. In January 2009, The Wall Street Journal and Forbes cited Paul as one of the few who identified early on the formation of the housing bubble and foresaw the economic and financial market havoc that would ensue after the bubble inevitably burst. Through written commentaries containing his straightforward and often nonconsensus analysis of economic and financial market issues, Paul has developed a loyal following in the financial community. The Northern's economic website was listed as one of the top ten most interesting by The Wall Street Journal. Paul is the co-author of a book entitled Seven Indicators That Move Markets.

Paul began his career as a research economist at the Federal Reserve Bank of Chicago. He has taught courses in finance at the DePaul University Kellstadt Graduate School of Business and at the Northwestern University Kellogg Graduate School of Management. Paul serves on the Economic Advisory Committee of the American Bankers Association.

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