Rory Robertson
Rory Robertson
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I think it's going to be 50 basis points because the Fed is worried about the economy, and I think the accompanying statement will reflect that.
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The longer the Fed drags this out without cutting rates, the more they're admitting they don't have much firepower at all. They're sitting on their hands, hoping for the best.
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The thing driving service prices is wage growth, and after two years of sub-par economic growth, we've got wages decelerating. If the Fed doesn't get the economy growing at an above-trend pace in the next couple of years, deflation will arise.
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The inflation risk is less intense than many would imagine and, as energy prices edge lower, some investors are seeing value at current yields. It helps reduce the pressure the Fed has been worried about.
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The markets were a little disappointed that the Fed didn't give any explicit hint that a pause is around the corner.
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There's a perception that the economy is actually doing quite well, in particular the labor market. It's a fairly straightforward assumption the Fed would want to hike rates in March and perhaps in May. You might see bond yields go higher.
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The Fed ultimately will be forced to cut rates further because we have had this ongoing issue of sub-par growth, disappointment on the jobs front and core inflation edging lower. People are talking about a terrific snap-back in the economy after the war, but I'm skeptical we're likely to see it.
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The Fed is trying to do what it can, but the history of the past 200 years is that big booms tend to end badly -- big equity market booms in particular. The Fed so far has done a magnificent job of holding the show together, but we don't know what effects of the bubble are still in the pipeline.
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Financial conditions clearly are quite a bit tighter than they were six weeks ago. I'd be dumbfounded if the Fed was not anxious about this dramatic rebound in yields dampening the rebound in the pipeline.
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Rising oil prices are quite unhelpful, and falling prices are quite helpful in terms of giving stimulus to the economy. Lower prices feed through pretty well to everyone immediately.
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If we hadn't had a recession a year ago, and we were watching the fall in employment, a stalling manufacturing sector, falling bond yields and falling stock prices, many people would think we were entering a recession. There's an assumption that the recovery will continue and get stronger next year, when in fact it's possible the economy's tipping over again.
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I think the back-up in rates should rate a mention -- it's the most significant thing that's happened to the economy in the past seven weeks.
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The markets are coming to understand that policymakers will be inclined to keep rates very low for an extended period -- the FOMC (Fed rate-setting committee) can still only dream that the economy will be strong enough in 2002 to justify a rate hike.
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At this stage, the worst-case scenario for the US economy post-Katrina simply is not playing out.