Fed Pauses Again, Rate Cut on the Horizon?

by: Steven Towns

Excerpt from our One Page Annotated Wall Street Journal Summary (receive it by email every morning by signing up here):

Fed Cites Energy, Housing Declines In Holding Rates and In Wake of Decision, Economists Debate if Fed Is Done Raising Rates

Summary: After 17 consecutive quarter-point rate hikes the Fed has now paused in its last two rate decision meetings keeping its fed fund target at 5.25% but still signaled a bias toward raising rates. In its accompanying statement the Fed attributed "(continued) moderation in economic growth ... partly ... (to) a cooling of the housing market." It commented that it sees inflation pressures likely moderating over time due to "reduced impetus from energy prices" as oil futures have fallen 22% since mid-July. There's no consensus among economists regarding the Fed's next move but in their eyes the Fed appears more comfortable pausing even though it still mentioned "some inflation risks remain" over the longer-term. The Fed next meets on Oct. 24-25. There's growing market speculation it will cut rates once by June. Summary of economists' reactions: 1) Economic Outlook Group: Bernard Baumohl says the soft landing outlook persists but warns growth could quicken, which will have "significant implications for interest rates, stock prices and currency values." 2) BNP Paribas Market Economics: Expects housing decline induced economic slowdown forcing Fed to "cut rats rapidly ... (from) around the turn of the year." 3) MFR Inc.: Joshua Shapiro cites the similarity of the last two Fed accompanying statements. Sees monetary policy on hold unless there's a big change in either direction in economic growth or more stubborn core inflation readings. 4) RBS Greenwich Capital: Stephen Stanley expects another rate hike by year's end due to increased consumer spending from lower energy prices. Views early-'07 monetary easing as aggressive versus Fed's outlook. 5) Insight Economics: Steven Wood says the Fed could be on hold for an "extended time." He says further tightening would require "several months of worse-than-expected readings." 6) Morgan Stanley U.S. Economics: Expects recent plunge in fuel prices to cause reacceleration of growth bringing the Fed back in the game by year end. Says even if economic growth continues to slow "it's hard to conceive of the Fed easing before mid-2007." 7) Bear Stearns U.S. Economics: Forecasts eventual Fed rate hike with target of around 5.75%. Cites Fed's consistent view of elevated core inflation and some risks of inflation remaining. 8) Global Insight: Brian Bethune says it's very likely the Fed holds at 5.25% through summer '07. Also says there's a very high probability of rate cuts late next year to 4.75% target rate. Read full article >
Related links: Wednesday's Fed Release: Where's The Analysis of the Economy?!S&P 500 Movement and Fed Rate Decisions: No Visible CorrelationFed's Not Done Raising Rates • The Wall Street Journal: PARSING THE FED: Pause, or Stop? • FRB: September statement, August statement

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