Saturday, October 27, 2007

Stand Pat

Not much time recently. I wanted, however, to make a note of my thoughts on FED policy ahead of next weeks meeting. As I mentioned before I have been consistently more hawkish than the Bernanke or Greenspan Feds.

Last time I called for 50 bps, with another 25 in Oct based on where the data was trending.

The data did not, however, unfold as negatively as I had guessed. My stance would be to hold on Oct. and wait for the data to cut again, possibly another 50 bps in December.

Part of my reasoning is that we do not in fact have enough data to justify a cut, and partly because the thinking on Wall Street has evolved into believing there is a FED put. While balancing inflation expectations and unemployment should always be the FEDs predominant concern, efforts should be taken to relieve the moral hazard posed by presumptions that the FED is "pro-stock market." This provides the perfect opportunity to accomplish both goals.

I would say something to the effect of:

The Federal Open Market Committee decided today to keep its target for the federal funds rate at 4-3/4 percent.

While trends in the consumer real estate remain negative and the outlook for overall growth is slightly below potential, financial markets have stabilized considerably since the summer.

Recent readings on inflation have been promising and core inflation has moderated as expected. However, headline inflation readings remain elevated and there are concerns that secular trends in agricultural prices will begin to raise inflation expectations.

While risks to both inflation and output remain, the committee's predominant concern is that an acceleration in the housing correction could contribute to protracted weakness in US growth rates. The committee will monitor data as it comes in and is prepared to act, rapidly if necessary, in response to significant deterioration in output and employment.

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