Fed Watch

The FOMC will be releasing their assessment of monetary policy this afternoon. While it’s virtually a foregone conclusion that they’ll decide to raise the Federal Funds target rate by .25% to 1.25%, a lot of attention will be paid to the wording of the brief statement that will accompany the announcement. Is the Fed worried about inflation? Are they worried about a potential slowdown of the economy? Both? Neither?

I’ve argued before that I think that if you’re going to change interest rates, you should do it in a larger increment than one quarter point. But it’s still an open question in my mind about whether interest rates need to rise at all. Yes, inflation has picked up a bit recently, but much of that rise was due to a possibly temporary increase in oil prices (and which does seem to be reversing in recent weeks), and the level of inflation is still relatively low.

On the other hand, the economy is not growing particularly fast – 3.9% growth is rather modest by the standards of most recoveries – and there are reasons to worry about the recovery’s sustainability, both because of waning economic stimuli and the future behavior of asset markets.

If I were on the FOMC (surprisingly I haven’t yet been invited), I would vote to keep interest rates constant a bit longer. But I would probably be outvoted.

Kash