Vital Market Prices at Time of Prior FOMC Announcements

November 4, 2009

  EUR/$ $/JPY 10Y, % DJIA Oil, $
06/30/04 1.2173 109.44 4.63 10396 37.95
06/30/05 1.2090 110.89 3.96 10370 57.00
06/29/06 1.2527 116.07 5.20 11077 73.41
06/28/07 1.3452 123.17 5.10 13456 69.82
08/07/07 1.3749 118.55 4.73 13510 72.27
09/18/07 1.3888 115.75 4.51 13475 81.42
10/31/07 1.4458 115.28 4.42 13873 93.59
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 1.5445 108.42 3.97 11484 119.82
09/16/08 1.4144 105.16 3.36 10936 91.18
10/08/08 1.3625 99.87 3.50 9447 87.02
10/29/08 1.2933 97.15 3.81 9145 67.38
12/16/08 1.3790 90.14 2.52 8687 44.14
01/28/09 1.3253 90.01 2.61 8356 42.92
03/18/09 1.3115 98.13 2.94 7340 47.73
04/29/09 1.3331 97.06 3.02 8194 51.05
06/24/09 1.3984 95.43 3.59 8373 68.76
08/12/09 1.4221 96.17 3.71 9366 70.64
09/23/09 1.4779 91.50 3.50 9859 69.13
11/04/09 1.4830 90.71 3.51 9913 80.17

 

The dollar, Treasury yields, and equities are extraordinarily close to where such were six weeks ago when the previous FOMC statement was released.  In contrast, oil prices have advanced 16.1% and stand 87% above their level when the FOMC held its first meeting of 2009 back in January.  No possibility exists of the Fed funds rate being raised today or within many months from now.  But before that happens, language about the onset of rate tightening will change, and already officials have shut down parts of its quantitative easing like the program that purchased $300 billion of Treasuries.  The main suspense surrounding today’s statement concerns the clause that the FOMC continues “to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period.”  When the range target on the funds rate was lowered last December, this clause initially ended with the words “for some time,” and these were repeated at the late January meeting.  After the mid-March meeting when officials noted that “the economy continues to contract,” the expression was modified to “for an extended period.”  By September’s meeting, the FOMC could report that “economic activity has picked up following its severe downturn” and that “conditions in financial markets hav
e improved further.”  But the statement cautioned that “economic activity is likely to remain weak for a time” and predicted “that inflation will remain subdued for some time.”

Prior to the last Fed rate tightening cycle which began in late June 2004, the FOMC gave about five months of lead time.  The December 2003 statement had indicated that “policy accommodation can be maintained for a considerable period.”  The January 28, 2004 statement revised such to “the Committee believes that it can be patient in removing its policy accommodation” and repeated those words in a statement dated March 16.  A statement on May 4th locked and loaded the tightening cycle, asserting “that policy accommodation can be removed at a pace that is likely to be measured.”  Unbeknownst to the market, that was an incredibly accurate foreshadowing of future policy, as the Committee proceeded to hike the Fed funds target from a base of 1.0% by 25 basis points but no more than that after each of the following 17 scheduled FOMC meetings to mid-2006.  Looking back, the belief by officials is that such an extremely slow return to normal rate levels was handled incorrectly.  Private critics have been more emphatic in blaming that glide path for nurturing the property market asset bubble that triggered the global recession.

As noted in a post here yesterday, the $64,000 questions concern how reliant recovery has been on monetary stimulus and the rebound of equity prices, how well or poorly equity markets tolerate rising interest rates, and the impact of such on confidence and demand.  An additional uncertainty involves the coordination of the reversals in monetary and fiscal policy, if indeed there is any.

Copyright Larry Greenberg 2009.  All rights reserved.  No secondary distribution without express permission.

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