Market Vital Signs at Selected Prior FOMC Meetings

August 5, 2008

  EUR/$ $/JPY 10Y, % DJIA Oil, $
06/30/04 1.2173 109.44 4.63 10396 37.95
06/29/06 1.2527 116.07 5.20 11077 73.41
08/07/07 1.3749 118.55 4.73 13510 72.27
12/11/07 1.4682 111.49 4.11 13645 89.78
01/30/08 1.4792 107.31 3.70 12454 91.70
03/18/08 1.5786 98.73 3.41 12257 107.53
04/30/08 1.5562 104.58 3.83 12953 111.54
06/25/08 1.5568 108.37 4.18 11837 133.62
08/05/08 1.5466 108.20 3.98 11491 119.11


The greatest market shift since the FOMC met in late June involves oil prices, which initially advanced another 10.7% to a peak of $147.91/barrel in mid-July but subsequently plunged almost $30 and unwound two-thirds of the 20% jump that had occurred between the penultimate and June meetings.  The FOMC in June had found threats to economic expansion somewhat diminished, a view that subsequently evaporated, as attested by a 2.9% drop of the Dow Jones Industrial Average and a 20-basis point decline in the 10-year Treasury yield despite worsening actual and expected inflation.  The dollar is little changed on balance since the FOMC meeting on June 25th.  The Fed is not expected to change rates today as officials endeavor to strike a rhetorical balance between fighting inflation and lending support to an ailing economy and fragile financial system.  While the Fed is mandated to achieve both priorities, other central banks that are instructed only to preserve stable prices in actuality face the same dilemma as Fed officials.  Sub-trend growth over a prolonged period is expected to depress inflation so long as firms and consumers do not lose confidence that price stability will be reestablished.

The Reserve Bank of Australia became the latest central bank to shift its policy bias toward ease.  While Australia has some company, for example the Reserve Bank of New Zealand, the Fed is at a different stage of the policy cycle.  The Australian cash rate was left unchanged at 7.25% in an announcement at 04:30 GMT today, but the Bank’s statement of explanation no longer called “the current stance of monetary policy appropriate” as its July statement had done.  The new statement added, “with demand slowing, the Board’s view is that scope to move towards a less restrictive stance of monetary policy in the period ahead is increasing.”  The statement in July had merely pledged to continuing evaluating “prospects for economic activity and inflation in the light of new information.”  The Fed and RBA are crossing ships at sea.  Fed officials want the 2.0% Fed funds level to be a trough and have rhetorically implied that the next rate move is more likely to be up than down.  Their Australian counterparts feel that 7.25% is a suitable rate peak and that the next rate change will be downward.  The RBA implied that they will move soon, perhaps next month.  The Fed has left timing more vague.  Both central banks face a stagflationary global environment, and the uncertain future path of oil prices could overwhelm any current predispositions.  The major difference between Australia and the United States is their different monetary policy histories.  Australian policy has tightening considerably, as the cash rate was raised four times in the past year, and the Aussie dollar peaked only last month.  The Fed has cut its rate by 325 basis points since September, creating a very loose policy setting.

Tags: ,


Comments are closed.