Tuesday, March 4, 2008

Forecast for Federal Funds Rate

Readers Question: What will the Federal Open Market Committee do with the Federal funds rate at their March 18, 2008 meeting?

  1. The FOMC will reduce the Federal funds rate by one-half point or more.
  2. The FOMC will reduce the Federal funds rate by one-quarter point.
  3. The FOMC will leave the Federal funds rate unchanged.
  4. The FOMC will increase the Federal funds rate by one-quarter point.
  5. The FOMC will increase the Federal funds rate by one-half point or more.

I think it is #3. Inflation concerns will keep them from lowering rates further, growth concerns will keep them from raising rates. I am not too sure my answer, so i’m looking for some input, thanks.

Thanks for question. It is hard to say, because recent economic data suggests a weakening economy. However, the fact that the FED have already cut interest rates by 1.25% recently doesn't give them a huge amount of room.

Some of the negative economic data recently:
  1. Falling Car Sales - In Feb General Motors Corp(GM.N), Ford Motor Co (F.N) and Chrysler LLC (CBS.UL) reported drops of 16 percent, 10 percent and 17 percent respectively
  2. Manufacturing activity weakest level for five years. Manufacturing activity came in Monday at 48.3. This is lowest level since 2003, despite the boost from the weakening dollar on exports
  3. Construction spending in January fell by 1.7 percent, the steepest amount in 14 years.
  4. Housing Market still in decline with house prices falling and mortgage market still in turmoil.
Cost Push Inflation makes decision difficult

The decision of the Federal reserve is made more difficult because of the increase in inflationary pressure from cost push factors. Rising prices of oil, commodities and food such as wheat mean many prices are rising, despite the slowdown in growth. This could push the FED into a difficult situation - deal with inflation or try and solve the economic downturn If things continue to deteriorate it could lead to stagflation, last seen in the 1970s.

Personally, I feel they will leave them unchanged. Although, I think they will be cut later in the year, perhaps in April. A problem that they may face is that interest rate cuts have less effect in boosting demand than they hoped.


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