FOMC - 20 Sep 2006

Reminder: FOMC Meeting on 20 Sep 2006. What is it going to be? Keep rates the same or hike them? (Or are we starting the cycle of dropping rates?)

the stock market is trading as if the next move in US rates is lower but the reality is that the FED is data dependent. (Read their lips) They paused in August - they are likely to remain on pause this week and the odds for December are probably imho 50/50 right now. The recent inflation data - and this is key - has still shown the risks of higher core inflation to come. Whether this data came from the GDP or the various Confidence indicators or the recent CPI. The next move in US rates is still likely to be higher and certainly if it were to be lower would be no sooner that many months away. Swiss rates are on the rise, European rates are about to go up again in October Japanese rates likely will rise before the year end and Chinese rates as well quite apart from New Zealand, South africa or even any of the developing nations. - This in turn means that capital competes and the current stance is for a genuine USD strong policy meaning that The US FED despite the new regime is most unlikely to drop rates for some time if for no other reason than getting it wrong. They are trying by stopping the 17 rate hikes to regain control of flexibility and stop the financial markets from descending into a tailspin. This they have successfully achieved both in terms of the bond and stock markets.

Thanks for your insight Alleyb - much appreciated.

The most recent probability predicted by the CBOT 30-Day Federal Funds futures contract is:

September 15: 90% for No Change versus 10% for +25 bps.

CBOT Fed Watch - September 19 Market Close

Based upon the September 19 market close, the CBOT 30-Day Federal Funds futures contract for the September 2006 expiration is currently pricing in a 5 percent probability that the FOMC will increase the target rate by at least 25 basis points from 5-1/4 percent to 5-1/2 percent at tomorrow’s FOMC meeting (versus a 95 percent probability of no rate change).

This notification concludes this CBOT Fed Watch period. The next scheduled CBOT Fed Watch period will start on Wednesday, October 18, one full week prior to the next scheduled FOMC meeting on October 25.

Summary Table
September 13: 89% for No Change versus 11% for +25 bps.
September 14: 90% for No Change versus 10% for +25 bps.
September 15: 90% for No Change versus 10% for +25 bps.
September 18: 90% for No Change versus 10% for +25 bps.
September 19: 95% for No Change versus 5% for +25 bps.

Release Date: September 20, 2006
For immediate release

The Federal Open Market Committee decided today to keep its target for the federal funds rate at 5-1/4 percent.

The moderation in economic growth appears to be continuing, partly reflecting a cooling of the housing market.

Readings on core inflation have been elevated, and the high levels of resource utilization and of the prices of energy and other commodities have the potential to sustain inflation pressures. However, inflation pressures seem likely to moderate over time, reflecting reduced impetus from energy prices, contained inflation expectations, and the cumulative effects of monetary policy actions and other factors restraining aggregate demand.

Nonetheless, the Committee judges that some inflation risks remain. The extent and timing of any additional firming that may be needed to address these risks will depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Susan S. Bies; Jack Guynn; Donald L. Kohn; Randall S. Kroszner; Frederic S. Mishkin; Sandra Pianalto; Kevin M. Warsh; and Janet L. Yellen. Voting against was Jeffrey M. Lacker, who preferred an increase of 25 basis points in the federal funds rate target at this meeting.