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What's Next?, May 8, 2006
Summary: The Fed is widely expected to hike its policy rates by another 25 basis points this week, but what's next? In truth, the Fed is not sure. Somehow, they must convey to the market that they could leave policy unchanged for some period without foreclosing the possibility of further rate hikes down the road, perhaps sometime soon. Communicating transparently is proving more difficult than expected, even by a Fed committed to being clearer about its intentions.
The Fed is widely expected to hike its policy rates by another 25 basis points this week, but what's next? In truth, the Fed is not sure. Somehow, they must convey to the market that they could leave policy unchanged for some period without foreclosing the possibility of further rate hikes down the road, perhaps sometime soon. Communicating transparently is proving more difficult than expected, even by a Fed committed to being clearer about its intentions.
The problem is that the Fed does not know how high interest rates need to go. This is not really surprising. Fed officials are not omniscient, so they must figure it all out, just as we investors must do so. It's been easy, with the Fed laying it all out for the market, although it wasn't really overly difficult judging that rates would rise from 1%. Now comes the hard part.
The key to...
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This section contains 427 words (approx. 2 pages at 300 words per page) |
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