The FED’s recent rate-slashing cycle appears to be nearing an end, but markets are anticipating one last cut (a quarter point).
The real rate of interest, as a result of policy easing, is at dangerously low levels, verging on negative territory and creating the potential for wealth destruction — a no-no for the FED. Recovering from a negative real rate of interest is not an easy proposition (case in point: Japan).
Over the past 6 months the FED funds market has resembled a Wal*Mart, as opposed to a central bank lending facility, with the benchmark cut 300bps. An additional 25bp reduction may seem minuscule compared to recent policy moves, but today’s decision will be a vital crossroad for the FED at the corner of inflation and possible recession — though today’s advance Q1 GDP figures put off the “R” word at least until the next revision.
Today’s announcement signify the end of the easing cycle, regardless of the FOMC’s decision whether or not to cut rates. NAR chief economist and housing market optimist Lawrence Yun, a fervent supporter of recent Fed rate reductions, last week cautioned the FED against further easing, saying it could potentially push mortgage rates higher.
The FED’s Richard Fisher recently addressed the ineffectiveness of recent rate cuts in easing lending tightness and settling financial markets.
The FED has little to no control over commodity futures markets, and while surging energy costs can be blamed on speculation and overseas demand, policy easing and the corresponding drop in USD value has also pushed energy prices higher.
The FED must be considering the likelihood that commodity prices won’t decline, a worst-case scenario with staglation potentially written all over it. FED speakers have recently taken an increasingly hawkish tone, addressing upward price pressures and continued credit market strife. Though uncertainty and illiquidity still threaten markets, conditions have improved since the FED began slashing rates.
A breakdown of the 9 FOMC voters:
Ben Bernanke: Moderate, has been wishy-washy in indicating policy bias. Supports the new lending facilities as a means to repair troubled credit markets. May be swayed by other voting member biases.
Don Kohn: Moderate, a champion of low inflation who never dissented but has issued heightened growth concerns as of late.
Kevin Warsh: Moderate-hawkish; issued inflation warnings recently and has addressed the shortcomings of public liquidity as a cure-all for financial markets.
Randall Kroszner: Moderate; has devoted recent speeches to Latin American debt and community development, so current views unknown.
Frederic Mishkin: Dovish; has observed ongoing stress in financial markets recently, indicating he may favor more monetary easing.
Timothy Geithner: Moderate; has not spoken in public recently but tends to vote along with the consensus.
Sandra Pianalto: Moderate; has favored less accommodative action in the past but her recent comment suggests she will go along with the mainstream.
Charles Plosser: Hawkish; dissented at the last FOMC meeting and indicated recently that rate cuts are not the way out of this crisis.
Richard Fisher: Hawkish; has dissented at the past 2 FOMC meetings and has spoken frequently about the dangers inflation poses for the economy.
Gary Stern Moderate-hawkish; said in a recent interview inflation remained stubbornly high though he expects price pressures to moderate as the economy slows.