Monday, March 17, 2008

Fed Funds

Markets are expecting a big interest rate cut from the Fed later this week. The target for the Federal Funds rate, now at 3 percent, is expected to come down by at least 50 basis points. According to options data analyzed by the Cleveland Fed (click on the graph above to enlarge), even a cut of a full percentage point is given about a one in four chance.

Meanwhile, the past president of the Cleveland Fed chastises his former colleagues:
The Fed needs to quit chasing declining GDP growth and instead focus on curbing inflation and anchoring inflation expectations. Recent allusions to the stagflation of the 1970s are appropriate.
Do the inflation hawks still on the FOMC (Charlie Plosser perhaps) have a similar view? Will they dissent and perhaps even become openly critical of Fed policy if large interest rate cuts continue? It is a particularly fascinating time to be a Fed watcher.