Fed Leaves Rate at 5-1/4

[cr]

Release Date: March 21, 2007

For immediate release

The Federal Open Market Committee decided today to keep its target for the federal funds rate at 5-1/4 percent.

Recent indicators have been mixed and the adjustment in the housing sector is ongoing. Nevertheless, the economy seems likely to continue to expand at a moderate pace over coming quarters.

Recent readings on core inflation have been somewhat elevated. Although inflation pressures seem likely to moderate over time, the high level of resource utilization has the potential to sustain those pressures.

In these circumstances, the Committee’s predominant policy concern remains the risk that inflation will fail to moderate as expected. Future policy adjustments will depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Thomas M. Hoenig; Donald L. Kohn; Randall S. Kroszner; Cathy E. Minehan; Frederic S. Mishkin; Michael H. Moskow; William Poole; and Kevin M. Warsh.

Source: http://www.federalreserve.gov/boarddocs/press/monetary/2007/20070321/

[LA_Renter]

I hope people weren’t short on any HB’s today, the squeeze is on. It appears the Fed took away any language about further tightening which the market interprets as a stepping stone to a rate cut. Those swing trades can be brutal.

It appears to me the FED is stuck. This has the appearance of Stagflation. They know this “adjustment in the housing sector is ongoing” i.e. bottom is falling out, and they know this is going to impact the economy but you have this stubborn bout of inflation hanging on and a grave risk to the dollar if they cut. These upcoming ARM resets will be pretty brutal this year with not much in they way of help. I know there is quite a bit of pressure on the FED to start cutting right now. IMO the days of reinflating this housing bubble are coming to a close. By the time the FED can ease the housing downturn will be at a point of no return. In all honesty I think we have passed that point anyway.

[poorgradstudent]

I agree that the Fed is stuck. I don’t think we’re in stagflation yet, but the risk is definitely there. A slowing economy COULD slow inflation enough to give breathing room for a rate cut, but that’s far from certain.

Although I’m not complaining about the gains in my portfolio, today’s rally after the announcement looked like a Fool’s Rally to me. Considering I read the Fed’s statment to mean “The Economy isn’t great, but Inflation is too high to give a rate cut”, there really was nothing to celebrate. I guess some investors must have been fearing aggressive anti-inflation rhetoric.

I’m definitely watching closely and considering closing a position or two as we move back towards 1460 on the S&P 500, the previous breaking point back in Feb.

[cr]

A lot of what I hear are Bullish expectations that the Fed will cut rates to bail out the housing crash with another stock bubble. The irony is that the housing bubble is generally regarded as having bailed the stock market out after dot.com and 9/11.

If they do cut rates, the cycle continues further devaluing the dollar, and increasing our collective debt, while people take money out of housing and put it into artficially inflated stocks.

What are the chances the FED will actually cut rates?

[Happy renter]

Fed concerns about the inflation a lot and wants to keep it at 2%. It is 2.2% right now. Fed tended to increase the interest rate, but it worried about the real estate market. So, it kept it 5.25% for now. I think Fed will look at the future data & housing market to determine the interest rate in the next meeting!

[LA_Renter]

Inflation is a lagging indicator. Thats why the fed is in a tight spot. They raised .25 17 times to 5.25 and inflation looks more problematic now than it did during the last meeting. The problem is that inflation could be problematic well into the middle stages of a pronounced recession. But the risk of ignoring it and letting it get out of control are even more dire. The Fed took a slightly softer stance on more tightening to leave the option open to cut in order to head off a recession. Now here is something that bugs me. It’s the mentality to avoid a recession at all cost. Thats what got us into the mess we are in today. Greenspan lowered the Fed funds rate to 1% to head off the recession from the nasdaq implosion and the aftermath of 9/11. As a result we created a huge housing bubble. Now we are looking at $1.7 trillion of ARMS resetting and alarming rate of NOD’s and foreclosures. Lets just be honest we are going to have a recession, we actually need a recession as crazy as that sounds. Recessions correct the excesses of the previous boom. Notice the word CORRECT. Lets just take our medicine and get it over with. There are no shortcuts here. My fear is that they are going to inflate another bubble to ease the pain of this last bubble. The end result of this path wont be a recession but an all out Depression. IMO

[LookoutBelow]

The people with resetting ARMs are pissed, they wanted a lower rate….

The Chinese are pissed, they wanted a higher rate !!

Everything is jussssst right….!

 

I think the fed has got his nutz in a big vise now.

Destroy the dollar ?

Or

crash the national (global) economy ?…Hmmmm…?

 

Decisions, decisions……?

Glad Im going surfing …decisions like that would give me a headache, nobody can surf with a headache…

[Happy renter]

LA_Renter,

I agree with you! The Fed’s policy created 2 bubbles: 1 stock and 1 housing. Unforuntely, a lot of people never realize they are at risk for borrowing too much! They think the US economy is very good. Most of my friends still insist no housing bubble and it won’t crash.

This time, Fed will do everything to stop the housing bubble. I’m so excited to see what Fed’s going to do this time. That’s good that most of us here are knoweledgeable, rational and realize the threat. We are well prepared.

[PerryChase]

Whatever happened to letting the markets work? Didn’t we lecture the Asians and South Americans against intervention?

[ucodegen]

What are the chances the FED will actually cut rates?

Probably not good. One big problem; we are presently running a deficit. To fund the deficit without increasing M0(money supply-‘printing money’), treasuries have to be issued. The US savings rate is dismal, foreigners have been buying treasuries(see note below) which they are less inclined to do now. Who is going to pick up these treasuries if the rate of return is lower?

NOTE: Some of the treasuries (and other investments) have been picked up through carry trade with the Japanese currency. Get a Japanese loan and then buy a higher yielding security (treasury).. make money on the spread between yields, on money that is not yours.. — Japanese have been increasing their rates and the yen currency is getting stronger. This cuts down/off the number of treasury buyers using the carry trade.

Greenspan lowered the Fed funds rate to 1% to head off the recession from the nasdaq implosion and the aftermath of 9/11. As a result we created a huge housing bubble

The greatest cause of the bubble was not the lowering of the rates, but the use of “Wall-Street” financing which walks around the banking laws. Both the Fed and FDIC have little control over these guys. Rates started going up in 2003, but house prices peaked in 2006. If it was due to rates alone, house prices should have peaked in 2003. In fact, the largest percentage gains in house prices were between 2003 and 2006.

[ucodegen]

I think the fed has got his nutz in a big vise now.
Destroy the dollar ?
Or
crash the national (global) economy ?…Hmmmm…?

I am betting on destroy the dollar.. It could help balance trade in the process and keep American industries running. I think Warren Buffet is betting this way too.

[LA_Renter]

ucodegen,

Many good points. I believe Greenspan lowering to 1% gave rise to the ARM phenomena, the teaser rates were tied to short term rates. They only raised .25 at a time, so the time frame between 2003 through much of 2005 those ARMS were still really low. You mentioned the carry trade and i think that is what really caught the FED off guard. I remember especially in late 2004 and 2005 that the fed was raising and mortgage rates on 30 year mortgages (which are tied to the 10 yr note) were going down. Usually as the fed tightens the long bonds reflect that tightening. But thats not the case when Japan interest rates are zero and they are cranking out liquidity that is not sticking in Japan and is looking for some place to go like U S Treasuries and I’m sure it found its way into the “Wall Street” financing you pointed out. Basically they turned a money faucet on and it turned into an unstoppable fire hydrant and it found its way into the asset of the day….Real Estate. Now we are sitting here with property values sitting at 10 to 12 times incomes in bubble markets and loans that are coming due that people have no way of paying back. What a tangled web the Fed can weave.

Regarding destroying the dollar, that scares me to death and I don’t think it will work. If the dollar craters, then US Treasuries are less appealing and fall in value sending interest rates up higher. I can tell you one thing I wouldn’t want to be Bernanke right now.

[ucodegen]

You mentioned the carry trade and i think that is what really caught the FED off guard.

I think the carry trade got everyone off guard. I noticed the stock market drops and back-traced it. The sub-prime meltdown is limited(for now) and wouldn’t cause that kind of perturbation.

Regarding destroying the dollar, that scares me to death and I don’t think it will work. If the dollar craters, then US Treasuries are less appealing and fall in value sending interest rates up higher.

It is the only way I can see out of it, that is do-able. If they crater the dollar, they can increase M0 and increase interest rates. The deficit gets funded by printed money and doesn’t have to be funded with Treasuries. It does mean that those with cash assets in the US get screwed. It also does bring in Treasury purchasers because of the higher yield (long time holders vs short time).

I can tell you one thing I wouldn’t want to be Bernanke right now.

Agreed.. What is also going on, and what I feel is really moving things.. is much more complicated than the general media is covering..

[LA_Renter]

“It also does bring in Treasury purchasers because of the higher yield (long time holders vs short time).”

My question is would it bring in Treasury purchasers if they are investing in a falling currency?? How high would those interest rates have to be? I really don’t like thinking about this.

[Author]

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