The Fed Will Overshoot in Lowering Rates

Includes: DIA, IEF, SPY
by: David Merkel, CFA

It just shows how high the pressure on the FOMC is, if they have to peremptorily act one week ahead of their regularly scheduled meeting. Again, one week doesn’t matter much in terms of actual policy impact.

Yet, they may do more at their meeting. Though I called for a 3.00% Fed funds rate in 2008, I wasn’t thinking of the beginning of the year… more like the middle-to-end. Now it seems to be a first quarter phenomenon. And, as I have said since the beginning of this move, given that the FOMC has been willing to use crude policy tools like the Fed funds rate to try to reflate areas where credit stress is high, they will overshoot. The lags in the action of monetary policy versus the immediacy of political pressure forces the overshoot.

My questions: how low do we go with the Fed funds rate, and how much will price inflation run in the process?