Fifteen In A Row For FOMC, Market Increases Bet On Sweet Sixteen

By: Paul Kasriel | Thu, Mar 30, 2006
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Or maybe it's the final four, as Lehman sees it. As expected, the FOMC lifted its target fed funds rate another 25 basis points up to 4-3/4% by unanimous consent. The operative meeting-ahead paragraph was verbatim with what Greenspan had crafted on January 31. Gee whiz, continuity is fine but couldn't you change the wording a little, Chairman Bernanke?

"The Committee judges that some further policy firming may be needed to keep the risks to the attainment of both sustainable economic growth and price stability roughly in balance. In any event, the Committee will respond to changes in economic prospects as needed to foster these objectives."

Because the FOMC raised the funds rate today based on January 31 language, Pavlov's dogs are now panting that the FOMC will repeat on May 10 because of the same language of the meeting-ahead paragraph.

In the preamble, the FOMC sees economic growth moderating "to a more sustainable pace" after the first quarter's hiccup. There's been little impact of higher commodity prices on core inflation, unit labor cost growth is well behaved and inflation expectations remain tethered. Yet, you never know. So, when in doubt, onward and upward to 5% and flirt with the disaster of a recession. If a recession occurs, then the FOMC can be sure there won't be any inflation. Then the FOMC can start cutting.

The more things change, the more they stay the same. The Bernanke Fed, like the Greenspan Fed, like just about every Fed, does not trust leading economic indicators. So, unless everyone's favorite coincident indicator, nonfarm payrolls, weakens visibly, between now and May 10, it looks as though 5% is most likely.

Consumers - Today Is Better Than Yesterday, But What About Tomorrow?

The Conference Board announced today that its March survey of consumers showed their confidence up. The March composite index increased 4.5 points month-to-month to a level of 107.2 - its highest reading since May 2002. Chart 1 shows the behavior of the Present Situation index vs. the Expectations index, both of which are smoothed with a three-month moving average. Since the middle of 2003, consumers have gotten progressively more confident about their current situation and mildly less so about their future economic lot in life. Should they start getting more confident about tomorrow? Chart 2 suggests not. Along with the Present Situation Consumer Confidence index I have plotted the spread between the 10-year Treasury security yield and the fed funds rate - one of my, though not Bernanke's, favorite leading indicators. Notice that the spread narrows well ahead of the onset of recessions while consumers are blissfully confident about their current situation until just before they lose their jobs. History suggests that investors and policymakers would do better to pay attention to the behavior of the yield curve than to listen to consumers' view of their current situation.

Chart 1

Chart 2



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.

The opinions expressed herein are those of the author and do not necessarily represent the views of The Northern Trust Company. The information herein is based on sources which The Northern Trust Company believes to be reliable, but we cannot warrant its accuracy or completeness. Such information is subject to change and is not intended to influence your investment decisions.

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