Fed Will Crunch Debtors Further

Tuesday, March 28, 2006

And you thought the Fed will pause anytime soon? The latest FOMC statement says the opposite and anchors the expectation of more to come. On Tuesday, the Fed unanimously raised the Fed Funds rate another 25 basis points to 4.75% and this will certainly not be the last step this year.
Persisting inflationary dangers may appear anytime soon on the horizon, according to the statement.
"As yet, the run-up in the prices of energy and other commodities appears to have had only a modest effect on core inflation, ongoing productivity gains have helped to hold the growth of unit labor costs in check, and inflation expectations remain contained. Still, possible increases in resource utilization, in combination with the elevated prices of energy and other commodities, have the potential to add to inflation pressures."
All these potential footholds for inflation will keep the FOMC on its toes with more babysteps to be expected.
"The Committee judges that some further policy firming may be needed to keep the risks to the attainment of both sustainable economic growth and price stability roughly in balance."
The Fed certainly cannot be accused of being to cryptic. I still keep to my expectation that Fed Funds will be between 5.25% and 5.75%, looking at today's rally of crude oil which trades above $66 per barrel. Get on autopilot until May 10, the day of the next FOMC meeting.
Indebted Americans will feel the crunch as soon as their adjustable rate mortgage is up for readjustment. Read blogs like Calculated Riskfor your daily dose of bad real estate news that show all is not well in the property world and that a slowdown of consumer activity may be around the corner.


Wikinvest Wire