Like the quote about glasses being half full, economists are known, to their own admission, for being pessimistic. They are paid to worry. Thats why the profession is lovingly referred to as the dismal science.
This summer we finally caught a break from the Fed as they decided take a breather on interest rate increases after 17 in a row. However, we have been getting a broad spectrum of feedback from regional Fed presidents raising doubts about whether inflation is in check, inferring future interest rate increases. Seemingly talking “hawkish” about controlling inflation, with a weakening economy has got us all scratching our heads.
Caroline Baum, in her column this week: Fed Officials Are Paid to Worry, Talk Like Hawks [Bloomberg] she addresses this confusion.
Even with the sentiment shift and price declines over the past two weeks, the June contract, at an implied yield of 5.19 percent, is still fully priced for a 25-basis-point rate cut by midyear.
In other words, the Fed seems to be talking about inflation as another way to slow down the economy, without being forced to provide yet another increase in interest rates. The market has already priced in another cut by the middle of 2007 despite the rhetoric. Near term expectations as evidenced by the traded options on federal funds futures which measures public expectations of future Fed actions shows evidence that rates will likely stay put through the first half of 2007.
With mortgage rates remaining relatively stable right now, housing inventory at record levels but seemingly at peak, expect more hawkish (and confusing) language being disseminated from the Fed in the coming months to keep inflation in check.