| Updated: 28-Mar-06 15:17 ET |
Fed Hikes with Another in May
The Fed came through with the 25 bp hike the market unanimously expected. The policy rate hike to a 4.75% federal funds rate target was the 15th consecutive tightening at an FOMC meeting which started in June 2004. The move also leaves the discount rate -- the rate at which banks borrow from the Fed -- a quarter percent higher at 5.75%.
The policy statement expanded the Fed's review of the economy but left the policy paragraph virtually unchanged from January -- 'The Committee judges that some further policy firming may be needed to keep the risks to the attainment of both sustainable economic growth and price stability in balance. In any event, the Committee will respond to changes in economic prospects as needed to foster these objectives.'
The unchanged policy paragraph argues for the market to view the statement as it did in January -- with another tightening on the way at the next policy meeting -- May 10. The longer term outlook remains unclear as the market currently expects a pause after the May hike to 5%.
The economic review which preceded the policy paragraph noted the temporary factors behind the weak Q4 growth as Q1 growth is rebounding but expected to moderate later in the year. The modest effect on core inflation and the benefits from strong productivity on unit labor costs keep inflation expectations contained as resource utilization (reduced economic slack) and commodity prices (including energy) have the potential to add to inflation pressures. No surprises there.
The big question going forward is inflation risk as high energy prices and reduced economic slack provide the upward forces as the broad forces of globalization (global competition, low Asian import prices) and strong trend productivity (on labor costs) provide offsetting downward forces.
The Fed uses core personal consumption (PCE) prices as its inflation guide given its broad read. Core PCE inflation growth stands at 1.8% from a year ago from a 2.3% peak in November 2004 -- below the Fed's 2% estimate for 2006. Core consumer prices stand at 2.1% from a 2.4% high a year ago.
The Fed appears more willing to push the policy rate too far given that a partial reversal (an early 2007 ease) would lessen the risks of squelching economic growth. Given the comparably weak inflation trends a softer approach seems applicable but less likely -- a pause in tightening, an evaluation given the lagged effects from two years of tightening and a return to policy tightening if the economy calls for it. However, the leanings of this new caste of policy makers is untested as market credibility in the face of rising inflation risk argues for pushing policy rates higher to ensure confidence in sustaining the gains against inflation.
While Briefing.com favors a 5% policy rate peak in 2006 we recognize the risk that the Fed may go further and thereby provide an increased drag on the economy and equity markets.
New Fed Board Members -- the Fed Shuffle
White House advisor Kevin Warsh and a University of Chicago professor Randall Kroszner have been confirmed as two of the seven Fed Board Governors.
Warsh is the Administration's expert on financial issues and worked as an investment banker before joining the White House economic council. While his investment banking experience brings a 'real-world' perspective, his young age of 35 reflects his lack of experience after graduating from Harvard Law School just a decade ago.
Kroszner has an economics background. He served on the Council of Economic Advisors during Bush's first term and under Reagan. Kroszner is an economics PhD from Harvard and currently serves as a professor at the University of Chicago. He has spent time at the Fed and the International Monetary Fund as a visiting scholar and is best known for his academic work on financial institutions.
Fed vice-chairman Ferguson has announced his departure in April which removes him from the March policy meeting. Ferguson stepped in back in 1997 and is currently the Fed Governor with the longest served term. The vice-chairman's replacement will be closely watched.
* * * *
| Fed Economic Projections (central tendencies of February 2006) | |||
|---|---|---|---|
| 2005 Actual | 2006 | 2007 | |
| Real GDP (q4/q4) | 3.1% | 3.5% | 3%-3.5% |
| Core PCE prices (q4/q4) | 1.9% | 2% | 1.75%-2% |
| Unemployment rate (q4) | 5.0% | 4.75% - 5% | 4.75% - 5% |
* * * *
Fed Calendar and FOMC Voting Presidents
| 2006 Fed Calendar | ||
|---|---|---|
| Beige Book (14:00 ET release) |
FOMC Meetings (14:15 ET release) |
FOMC Minutes (14:00 ET release) |
| Jan 18, 2006 | Jan 31, 2006 | Feb 21 |
| Mar 15 | Mar 27-28 | Apr 18 |
| Apr 26 | May 10 | May 31 |
| Jun 14 | Jun 28-29 | Jul 20 |
| Jul 26 | Aug 8 | Aug 29 |
| Sep 6 | Sep 20 | Oct 11 |
| Oct 11 | Oct 24 | Nov 13 |
| Nov 29 | Dec 12 | Jan 2, 2007 |
While the seven Federal Reserve Governors always retain voting status along with the NY Fed president (who is also the FOMC vice chairman), the remaining four seats on the 12 member voting committee are shifted at the start of each year. The table below reviews the rotation -- see their biographies in the links at the bottom of the page.
| Voting Fed Presidents | ||
|---|---|---|
| 2005 | 2006 | 2007 |
| Geithner (NY) | Geithner (NY) | Geithner (NY) |
| Moskow (Chi) | Pianalto (Cleve) | Moskow (Chi) |
| Santomero (Phil) | Lacker (Rich) | Minehan (Bos) |
| Fisher (Dal) | Guynn (Atl) | Poole (St. L) |
| Stern (Minn) | Yellen (SF) | Hoenig (KC) |
Questions, comments or feedback may be e-mailed to the author: Timothy E. Rogers
| Fed Calendar | |||
| Date | Time | Location | Event |
| Mar 28 | 11:30 | Washington | Treasury's Snow talks to tax executives in Washington |
| Mar 28 | 14:15 | FOMC policy anncmnt at 14:15 ET | |
| Mar 29 | 08:45 | New York | NY Fed pres Geithner gives introductory remarks at bank conference |
| Mar 29 | 08:45 | New York | Richmond's Fed pres Lacker talks at Fed conf on payments |
| Mar 29 | 09:00 | New York | Fed Gov Bies talks on risk management |
| Mar 29 | 09:35 | Washington | Treasury's Snow speaks to Edison Electric Institute |
| Mar 30 | 12:30 | Dayton | St. Louis Fed pres Poole speaks at student investment forum |
| Mar 30 | 14:00 | Washington | Fed Gov's open meeting on Basel II |
| Mar 31 | 05:30 | Zurich | Departing Fed Vice Chair Ferguson speaks on financial regs in Switzerland |
| Mar 31 | 08:30 | Missouri | KC's Fed pres Hoenig speaks on economic outlook |
| Mar 31 | 10:00 | North Carolina | Fed Gov Bies speaks at Banking-Law conference |
| Mar 31 | 10:30 | North Carolina | Treasury's Snow hold roundtable at college in NC |
| Mar 31 | 13:00 | North Carolina | Treasury's Snow tours Selee Corp. facility in NC |
| Apr 03 | 07:00 | Frankfurt | New Fed Gov Kroszner speaks at European conference |
| Apr 04 | 06:30 | Frankfurt | Chicago's Fed pres Moskow speaks at European conference |
| Apr 04 | 07:45 | Kansas City | Kansas City's Fed pres Hoenig talks on monetary policy |
| Apr 04 | 12:00 | Texas | Dallas' Fed pres Fisher speaks on free enterprise |
| Apr 04 | 12:45 | West Virginia | Richmond's Fed pres Lacker speaks to economic roundtable |
| Apr 05 | 10:00 | Washington | Treasury's Snow testifies at House Appropriations Commitee |
| Apr 05 | 20:45 | Kansas | Kansas City's Fed pres Hoenig speaks on monetary policy |
| Apr 06 | 09:30 | Washington | Treasury's Snow testifies at Senate Appropriations Subcommitee |
| Apr 11 | 14:00 | Germany | Minneapolis' pres Stern speaks on economic policy in Berlin |
| Apr 17 | 08:30 | Atlanta | Atlanta's Fed pres Guynn speaks at Risk conference |
| Apr 17 | 08:35 | Atlanta | Departing Vice Chair Ferguson speaks at Risk conference |
| Apr 18 | 12:05 | Detroit | Chicago's Fed pres Moskow at Auto industry conference |
| Apr 18 | 14:00 | FOMC Minutes released | |
| Apr 25 | 12:00 | New York | Fed Gov Bies speaks to economists |
| Apr 26 | 14:00 | Fed's Beige Book | |
| May 10 | 14:15 | FOMC policy anncmnt at 14:15 ET | |
| May 26 | 12:00 | New York | Dallas' Fed pres Fisher speaks to economists |
| May 31 | 14:00 | FOMC Minutes released | |
| Jun 09 | 10:00 | Fed Chairman Bernanke speaks at MIT | |
| Jun 12 | 12:00 | Washington | Fed Chair Bernanke speaks at bankers' executive school |
| Jun 14 | 14:00 | Fed's Beige Book | |
| Jun 29 | 14:15 | FOMC policy anncmnt at 14:15 ET | |
| Jul 20 | 14:00 | FOMC Minutes released | |
| Jul 26 | 14:00 | Fed's Beige Book | |
| Aug 08 | 14:15 | FOMC policy anncmnt at 14:15 ET | |
| Aug 29 | 14:00 | FOMC Minutes released | |
| Sep 06 | 14:00 | Fed's Beige Book | |
| Sep 20 | 14:15 | FOMC policy anncmnt at 14:15 ET | |
| Oct 11 | 14:00 | FOMC Minutes released | |
| Oct 12 | 14:00 | Fed's Beige Book | |
| Oct 24 | 14:15 | FOMC policy anncmnt at 14:15 ET | |
| Nov 13 | 14:00 | FOMC Minutes released | |
| Nov 29 | 14:00 | Fed's Beige Book | |
| Dec 12 | 14:15 | FOMC policy anncmnt at 14:15 ET | |
