At Arm's Length - Financial Commentary about Money, Investing, and How It Affects the Average Investor

At Arm's Length: 05.04.05

Desperately Seeking Neutrality

"Pressures on inflation have picked up in recent months and pricing power is more evident." The markets were mixed in their reaction even as they anticipated the move by the committee.

Alan Greenspan and company spoke yesterday through the auspices of the Federal Open Market Committee by raising rates another quarter of a point for the eighth time in a year. The move to 3% was expected.

The worry about inflation, something the F.O.M.C. suggests is well under control largely due to their actions and monetary policy, has been increased in the short term with the rising price of oil. Although off the March highs of $58 and much like the effect these measured increases in the short term overnight rate, oil is gradually working its way into the prices being charged by both producers and retailers.

What the Fed seeks to do is find some neutral ground where the risks are matched by their accommodative stance. Still using the word "measured", now more of a salve for jittery markets than anything of substance, the Fed is beginning to worry that they have become too transparent of late. Much of the Fed's activity is being priced into the market well in advance of any changes in policy.

The Fed did vote unanimously to raise rates even as core inflation, the number without the volatile food and energy included, reached a seven year high of 2.2%. Growth has also slowed.

While the markets traded all over the board on the news, first down, then up and finally flat. The only unexpected twist in an otherwise normal pattern of events was the revised statement on the Fed web site. Several hours after the statement was issued the line, "Longer-term inflation expectations remain well contained." was added and the omission blamed on human error.

The cost of oil will continue to weigh on the economy in the coming quarters slowing growth for the full year. If Greenspan and company believe their policies are working, quarter point hikes might be the norm for the next two to three meetings. Not likely though. To reach their fed funds price target, they will need to increase the pace of rate hikes without broadcasting its intentions prior to the announcement.

While the minutes of their meeting won't be released for several weeks - the next anticipated news the markets wait anxiously for of late, the Fed will be waiting for their past increases to smooth the market transition from stimulated growth to one that is more on pace with global and domestic economic realities.

The previous week's articles.

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