Wednesday's Us Interest Rate Decision

[Webmaster]

Just wondered what everyone thought about tomorrow US interest rate decision.

Can't see them having a pause myself.

[karhu]

Just wondered what everyone thought about tomorrow US interest rate decision

Sorry, webmaster, this is a nobrainer, as they say stateside. It will be a 0.25%. They key is what the FOMC say, not what they do. Anything other than 0.25% would cause chaos as it is virtually 100% predicted.

[Webmaster]

Yep, I agree. Well lets try and predict what Bernanke is going to say then.

[karhu]

I can tell you. It is summed up by this:

FOMC to-do list: Hike rates, hint pause, talk tough

i.e., keep the markets guessing. Keep both the hawks and doves happy.

Edited May 9, 2006 by karhu

[Webmaster]

Someone disagrees, there's one vote for a hold!

[karhu]

Someone disagrees, there's one vote for a hold!

Don't forget TTRTR can also vote

WASHINGTON (AFX) -- The Federal Open Market Committee has three items on its

to-do list on Wednesday: hike rates, hint pause, and talk tough on inflation,

economists said.

The FOMC is expected to raise its federal funds target rate to 5.0% at its

third policy meeting of the year. This would be the 16th straight meeting over

almost two years with a quarter-percentage point hike.

Since the last Fed meeting on March 28, growth has been firm and inflation

figures have deteriorated, economists said.

"Recent economic statistics easily justify further tightening on May 10,"

said Michael Moran, chief economist at Daiwa Securities America.

Economists said Bernanke signaled that a rate hike was highly likely during

his testimony to the Joint Economic Committee of Congress on April 27.

In its March 28 policy statement, the FOMC said it believed 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."

Pointing to this language, Bernanke told the legislators: "in my view, data

arriving since the meeting have not materially changed that assessment of the

risks."

Bernanke then would like to pause to gauge if the lagged effects of two

years of rate hikes will have a dampening effect on growth.

A rate hike would also soothe markets, economists said, as it is widely

expected. In fact, it is impossible to find an economist who believes the FOMC

will pause Wednesday. A common refrain is that a failure to validate market

expectations could rattle already jumpy markets.** The road ahead

As is often the case, the unanimity of Fed watchers regarding a rate hike

does not carry over to the question of what and how the Fed will communicate to

the market in its post-meeting policy statement.

In general, many economists believe the Fed statement is "due for

maintenance," in the words of Robert DeClemente, economist at Citigroup.

Only a minority believe the FOMC will maintain the statement from March 28.

Economists who believe the statement will change say the FOMC needs a fresh

approach to get the market to understand its central message: the Fed wants to

keep its options open in June.

It could pause for the first time in 17 meetings or press ahead with further

rate hikes.

"It really could go either way in June," said Michael Englund, chief

economist at Action Economics.

"Bernanke is probably predisposed to stop at 5%," but he does not want this

to be seen as a fait accomplish, Englund said.

To signal a pause is on the table, the Fed will remove the language that

"some further policy firming may be needed," many economists said.

But some worry that removing the language would lead the market to assume a

pause is baked in the cake regardless of incoming data, with possible damage to

inflation expectations and the dollar.

Many economists believe the Fed could avoid this outcome with tougher talk

on inflation.

More forceful language about inflation vigilance will highlight that a

possible pause does not signal an end to tightening, they said.

It is also aimed at restoring Fed credibility after the communications

missteps last week when Bernanke's off-the-cuff remarks about policy were

revealed by a CNBC news anchor.

In March, the FOMC language on inflation was fairly benign. The policy

makers said that energy prices have only had a modest effect on core inflation,

productivity was holding down the growth of wages, and inflation expectations

remain contained.

"We would not be surprised if the Fed felt the need to more firmly stress

its vigilance with respect to inflation and, therefore, the FOMC's comments may

sound less sanguine on the inflation environment," said John Ryding, chief U.S.

economist at Bear Stearns.

Ryding said market inflation expectations have risen since the last FOMC

meeting, in part because of the Fed communications snafu.

http://freeserve.advfn.com/news_FOMC-to-do...h_15345705.html

** TTRTR -

Edited May 9, 2006 by karhu

[Realistbear]

I am not sure if it makes a great deal of difference what the Fed do. The key is what is Japan and the rest of Asia going to do? With Chinese inflation stoking up and the Japanese hiking IR with all the carry trade implications that flow from that the Fed is the least of the Bull's worries.

I see a IR hiking momentum building around the world with Asia stoking the fires due to their inflationary growth. Because Japan has served as the West's creditor and are no longer dealing in "free money" any hikes from their banks will be felt exponentially in the UK due to the ripple effect.

The UK is moving toward recession (BBC news tonight carried 3 job loss stories) and unless wages are inflated affordability and debt will kill the house market. The pound is out of control rising against the Euro as well as the dollar--hardly conducive to the struggling exports. In fact, it is possible that Bernanke will talk the dollar down as a way of avoiding a US recession now that the interest rate option has already been used up by Al. What may be good for the US could prove to be diastrous for Europe and the UK in particular.

We might look to OZ for a snapshot of what is to come --they were slightly ahead of us in the HPI stakes:

http://www.brookesnews.com/060805ausrecession.html

[karhu]

RB, the next call in the money markets is the difficult one. The world has been awash with cheap money, which cannot continue much longer or the whole system will implode. I personally think the next step in the cycle will be recession/depression. It seems to be the only thing that can restore a modicom of normality. Interest rates, CPI, irrational exuberance and the demands of the baby boomers have sunk us. Blame Gordon Brown!

Edited May 9, 2006 by karhu

[Realistbear]

RB, the next call in the money markets is the difficult one. The world has been awash with cheap money, which cannot continue much longer or the whole system will implode. I personally think the next step in the cycle will be recession/depression. It seems to be the only thing that can restore a modicom of normality. Interest rates, CPI and irrational exuberance, the demands of the baby boomers have sunk us. Blame Gordon Brown!

I tend to agree. The Chinese are already sounding alarm bells of bursting bubbles. There are very serious implications for bubble housing markets around the world:

http://www.thestandard.com.hk/news_detail....&d_str=20060508

Fund strategists warn of severe bubble burst

Inflows into Asian markets are accelerating as central banks around the world deploy stimulative monetary policies in the face of growing pressure to let their respective currencies appreciate.

Carol Chan

Monday, May 08, 2006

Inflows into Asian markets are accelerating as central banks around the world deploy stimulative monetary policies in the face of growing pressure to let their respective currencies appreciate.

This is leading some strategists to warn that regional stock indices will continue to rise in the near term, but when the bubble bursts it will be severe.

[Guest Bart of Darkness]

Sorry, webmaster, this is a nobrainer, as they say stateside.

Must be TTRTR who voted for a cut then, darn, ya gotta admire his dang crazy optimism.

[RobertPaulson]

as mentioned above 0.25% is an utter no brainer unless bernake wants to bring on a complete rout (I'm discounting .5%..). The key is in the text, any firm talk on pausing will see the dollar plunge, hints will probably see around 200bp drop vs EUR/JPY and full on rate hawk could well see a mild dollar bounce. It will also be interesting to see the treasury comments on china, full on declaration of 'currency manipulation' would also see a sharp dollar fall, given the political ramifications (they need china and russia onboard to get anything through on Iran at the UN) I can't see this happening, although if it does I would see it as a proxy declaration of war on Iran by implication.

Most likely, changed text from the FOMC but with only vague hints of a pause as bernake learns the benefits of greenspanese and a mixed treasury report, praising china for progress with a slight rebuke on currency float.

Result, dollar down. I don't think it could rallye if it tried.

More interesting is who the f*ck is buying GBP, its almost as pointless at the now dead bull market in TNX was, but is seeing some big solid money flowing in. Japs buying betty on the quiet?

[MarkG]

More interesting is who the f*ck is buying GBP, its almost as pointless at the now dead bull market in TNX was, but is seeing some big solid money flowing in. Japs buying betty on the quiet?

Maybe they're guessing that the BoE will have to follow history and raise rates to 1-2% above US rates? If Bernanke is forced to go to 6-7%, that would about double UK rates. Could be a good deal.

[frugalista]

More interesting is who the f*ck is buying GBP, its almost as pointless at the now dead bull market in TNX was, but is seeing some big solid money flowing in. Japs buying betty on the quiet?

This is what I don't get!

Okay, superficially GBP is resting on a strong economy, but where on Earth is the upside?

Massive open market forex operations by our friends and the BoE?

I am hoping it is a temporary blip as about 40% of my holdings are dollar denominated!

frugalista

[Guest wrongmove]

Well Betfair are offering 300/1 for a 0.25% cut, 40/1 for no change and 100/1 for a 0.5% rise !!

A 0.25% rise is 1/100. Looks pretty cut and dried.

[erd]

Just wondered what everyone thought about tomorrow US interest rate decision.

Can't see them having a pause myself.

Why no +0.5% option

[TwentyOneEleven]

Reuters going for a .25% rise today followed by a pause next month...

http://today.reuters.com/business/newsarti...NOMY-FED-DC.XML

[Priff]

I went for a hold.

I figure they are very near the end of the consecutive hikes (this month or next)

Having read the comments, I guess I may be a month (or 2) early on my prediction.

[CrashIsUnderWay]

.25 up

[vinny]

I guess at .25 up.

Gold and stock bulls may be dissapointed to hear!!!!!

Watch for some excitment either way in the markets.

[Realistbear]

This is what I don't get!

Okay, superficially GBP is resting on a strong economy, but where on Earth is the upside?

Massive open market forex operations by our friends and the BoE?

I am hoping it is a temporary blip as about 40% of my holdings are dollar denominated!

frugalista

I about 80% dollar denominated but with quite a bit in US Mutual Funds that are invested worldwide so there is some protection at least.

I cannot understand the ramping on the pound as the UK is in a worse positon that the US with about the same personal debt per capita and a growing deficit. Employment is weakening and there arew no upside indicators anywhere except for IR hikes which the money traders must be counting on. As of now, I am getting a higher rate on savings in the US than I would get here in the UK and it has not been that way for decades?

I can see the dollar weakness in relation to the Asian countries where there is true growth but against the pound where their is weak growth and top of the cycle fundamentals?

Further, Germany is reporting poor economic fundamentals again and the EU is hardly doing that well with GDP half that of the US. So what gives?

I believe the market will reflect reality soon and the pound will return to historic values at around 1.60. At almost 1.90 it is absurdly overvaluedl.

[FTBagain]

I believe the market will reflect reality soon and the pound will return to historic values at around 1.60. At almost 1.90 it is absurdly overvaluedl.

One or two more hikes by the Fed and no move by the BoE should see the pound weekening in a couple of months, but I have noted over the last six months or so a very strong corelation between movements in the pound and Oil. Just look at the six month graphs on the BBC. It is very striking. I can only assume the the Forex market have not fully understood the impact of peak oil in the North Sea, namely, 11% drop, at least in the last two or three years.

I reckon the pound could take a severe kicking if / when they fully understand the implications.

[RobertPaulson]

- "The recent strength of sterling," muses Tom Tragett,

your editor's expert currency contact, in a note. "It

seems most unusual - leaving aside the M&A flows -

especially given the extremely poor political domestic

backdrop and our pretty innocuous economy. But it all

makes sense if you figure that central banks are

conducting 'reserve adjustments'...getting out of US

dollars...and that some - mostly Middle Eastern banks -

clearly favour the Betty Grable."

- The Betty Grable? Cable is the name forex traders give

to buying sterling when selling dollars. Geddit? But

still this doesn't explain the almost phenomenal

strength of the proud pound in your pocket. Sterling has

risen from $1.73 to $1.86 in the past month alone. How

come?

- "Greenspan's famous conundrum has all but gone," Tom

notes. "Thirty-year US bond yields have surged as the

price of the bond itself has dumped from 97.25 at the

mid/end March to 89.50 at the close last week. This fall

in the 30-year bond price as coincided with the rise in

sterling over the same period. So someone's exiting US

Treasuries and piling into pounds. I reckon it's the

Japanese..."

- Regular readers will recall that the Bank of Japan has

an open position of some several hundred billion

dollars, bought when it wanted to depress the Yen and

stoke Japan's runt of an export-led recovery in 2003/4.

But they might not know what next-door's 'For Sale' has

got to do with Japan's post office savings accounts.

- "Naturally, Japan's intervention to buy dollars was

stuck into US Treasurys," says Tom. "Even when yields

dipped below 4%, they still paid a whole heap more than

Japan's own zero-rate bank deposits. Now of course, with

the Japanese economy on the up-tick, they might have

decided it's time to lighten up on their dollar

holdings. The world and his dog know the greenback is

due another tumble. Why play sucker and keep hanging

on?"

- Tom Tragett: "But the Japanese are the biggest holders

of US Treasury debt in the world. So they could never be

seen selling dollars and buying yen in the open market.

It would be like screaming fire in a crowded pub. The

dollar/yen would collapse into free fall. And this makes

their position unmanageable..."

- So the only way for them to remove the risk of a

dollar fall versus yen, says Tom, is to switch the

position slowly into another currency. "For example,

they would sell their Treasuries - and then sell the

subsequent dollar receipts for, say, sterling, for want

of a better protagonist. In order for this not to show

up immediately in their official reserve figures they

could use Kampo – the Japanese Post Office's life

insurance pot - to buy the sterling discretely in the

market over a period of several weeks/months."

- Take heed, warns Tom. "I am not saying that the BOJ is

buying sterling – and I'm certainly not advising anyone

goes long GBP/JPY just yet. But clearly someone very big

is getting into the pound...and it could be that the

Chinese, US, UK and Japanese have done a deal to get

Tokyo out of jail when the Chinese Yuan does finally

float and sink the dollar."

Sounds plausible but there is far more liquidity in Euro-Dollar, which perhaps explains the GBP/EUR rise against EUR and GBP (well and everything, even NZD) both going up against $? Not sure I totally buy it though, but something odd is going on..

[Justice]

RB

"The pound is out of control rising against the Euro as well as the dollar"

the big picture is the euro and i don't think the £Pound will do well against the euro for long.

The world has gone mad i tell you