The Federal Reserve’s FOMC meets today, and it’s widely expected that interest rates will again rise by 25 basis points, bringing Fed funds to 5.0%. That’s a prediction hardly worth the name, as the Fed’s been dispensing 25-basis-point hikes methodically since June 2004. Indeed, the Fed funds futures contract for May is priced for 5.0%, and hardly anybody expects a surprise.
What’s different this time around is that Fed Chairman Bernanke has recently suggested that a pause in rate hikes may be coming. But given the ensuing debate that Bernanke’s advisory triggered on the matter of his inflation-fighting credentials, some wonder if perhaps Ben may rethink his inclination to put tightening on a hiatus, temporary or otherwise.
A bit of uncertainty, in short, hangs over the policy outlook for the Fed for the first time in recent memory. Perhaps it’s unavoidable, given the ample dose of conflicting signals coming from the economy and the capital markets on the all-important question of whether GDP is or isn’t slowing more than a little. But no matter the cause, transparency has dropped down a notch or two for the Fed. For the moment, the central-bank transparency that Bernanke has long espoused as an academic looks to be on the defensive now that he’s running the money machine in Washington. That may change in the future, but in the here and now there’s a bull market in guessing where monetary policy’s headed, and that’s probably not what the Fed wants.
Or is it? Bernanke himself confessed in March that “the implications for monetary policy of the recent behavior of long-term yields are not at all clear-cut.” No one can accuse him of exaggerating, considering the current state of puzzlement over the future of Fed policy.