Monetary policy has an important role to play in addressing market dynamics. These dynamics tend to be particularly more sensitive during the Federal Open Market Committee (FOMC) regularly scheduled meetings.
One such meeting, the fourth of this year out of total eight scheduled by the FOMC (and others as needed) – will kick off Tuesday (6/24).
Based in the current flow of information, we believe the Federal Reserve is nearing an aggressive move upward in short term interest rates. Whether we have correctly absorbed and judged the import of each day’s data – remains to be seen. However, we think there is a strong possibility that the Fed will increase funds rate from the current level of 2% to 2.75%, and possibly reaching as high as 3% by the end of current fiscal ’08.
It is important to emphasize that while a rate hike in either the target federal funds rate or the discount rate may not materialize once Wednesday’s meeting’s concludes ; market participants will notice a change in Fed’s wording. That wording most likely will consist in Fed gradually shifting its focus from a balance of risks, type approach – toward addressing inflation issues more aggressively.
By adjusting policy proactively toward increasing signs of deterioration in inflation data as the risk to the outlook changes, (let’s keep in mind CPI is up more than 4% y/y basis) the Fed, through open market operations, can help reduce the probability of the extreme adverse outcome.