Time For Fed-Watchers to Watch the Fed
It’s what they say – not what they do – that will count.
Although the the U.S. Federal Reserve’s Federal Open Market Committee meets tomorrow and Thursday, most investors aren’t expecting the central bank policymakers to take any action on interest rates.
At least, not right now.
Indeed, although the FOMC is meeting this week to discuss interest rates, it is almost universall expected to keep the benchmark Federal Funds Rate steady at its current 5.25%–where it’s been since last summer.
But the policy statement the FOMC releases after its two-day session concludes on Thursday will be studied carefully for hints about the future direction of interest rates.
Uncertainty about market interest rates has played havoc with the financial markets, sending bond yields skyward and injecting an uncomfortable choppiness into already-turbulent stock markets. The tug-of-war in critical reasoning that forms the basis for every interest-rate debate is fueled by such competing and contradictory issues as the massive slump in the once-white-hot housing sector and the near-record highs in the prices of gasoline and other energy-related commodities.
Earlier this month, Fed Chairman Ben Bernanke said that elevated levels of inflation, excluding energy and food, may not pull back because the housing-market problems will crimp economic growth for a longer period than most expected.
“Although core inflation seems likely to moderate gradually over time, the risks to this forecast remain to the upside,” Bernanke said in remarks to a monetary policy conference in Cape Town, South Africa.
Bernanke was speaking from Washington, delivering his remarks via satellite.
“The adjustment in the housing sector is still ongoing, and the slowdown in residential construction now appears likely to remain a drag on economic growth for somewhat longer than previously expected,” Bernanke added.
However, Bernanke also said that so-called “core inflation,” is slightly elevated, but slowing ebbing. His reasoning: Even though gas and oil prices have risen, overall energy costs remain below their peak levels from 2006.
No wonder even the savviest of Fed watchers find it tough to forecast the Fed’s next moves.
Policymakers have reiterated time and again in recent months that they expect the U.S. economy to continue its advance, while also vowing that inflationary pressures will be kept in check.
It’s a reassuring stance.
When they’re not scrutinizing the central bank’s every move, Fed watchers will spend some time this week studying some of the other economic reports that could provide some additional insight on inflationary pressures in the U.S. economy. On Friday, for instance, the Commerce Department’s report on personal income and spending includes data on so-called “core personal consumption expenditure,” or “core PCE” inflation.”
As Fed watchers know, that’s the central bank’s preferred inflation indicator, meaning it’s closely watched by investors, too. Economists are forecasting an increase to 2.1% in May from 2.0% in April. Personal income is projected to have risen to 0.6% in May, compared with a decline of 0.1% in April. Spending will have increased 0.6% in May, compared with an increase of 0.5% in April.
The Fed last raised interest rates almost exactly one year ago, on June 29, 2006, increasing the afore-mentioned Fed Funds rate by a quarter percentage point to its current level of 5.25%. That was the fourth quarter-point increase of the year, and was the final increase of 17 the central bank made from 2004 to 2006, according to Federal Reserve Bank of New York statistics (http://www.newyorkfed.org/markets/statistics/dlyrates/fedrate.html). When the current rate-boosting campaign first started, the Fed Funds Rate stood at 1.00%.
