The Federal Open Market Committee, after raising the Fed funds rate today by a widely anticipated 25-basis points to 2.75%, explained in its statement, “even after this action, the stance of monetary policy remains accommodative….” Lest anyone worry that the liquidity is overdone, much less permanent, the stewards of the nation’s money supply presumed to put such fears to rest by explaining that “policy accommodation can be removed at a pace that is likely to be measured.”
Twenty-five-basis-point hikes, it seems, will remain a fixture on the American economic landscape for the foreseeable future. The Fed wears its pre-emptively disclosed monetary strategy on its sleeve these days while virtually patting itself on its institutional back for coming up with such a clever and enlightened scheme. But it remains to be seen if Mr. Market is willing to extend the admiration.
Indeed, the first draft of the bond market’s reaction to today’s FOMC action is less than encouraging. The yield on the trusty 10-year Treasury Note took flight after the Fed decision was made public. Tying up money for a decade with government debt will now lock you in at 4.63%, or thereabouts, as of today’s close in New York trading. That’s materially better than the 4% that prevailed in early February, but the burning issue is whether 4.63% will suffice tomorrow and beyond.
Count one John Bollinger as a skeptic. “Inflation is here, big-time, and we’re all in denial about it,” the president of Bollinger Capital Management tells today.
The bond market has been no stranger to denial in recent months, but it’s rapidly becoming less so with each passing day. The Fed, arguably, has yet to start drinking from the same cup of illumination by which the fixed-income set has started quenching its thirst for reality. Twenty-five-basis-point increases, in other words, are no longer convincing traders that the central bank is dispatching inflation-fighting ammunition in adequate quantities.
But hope springs eternal in the halls of banking’s nerve center. As evidence, we return again to the FOMC’s press release du jour. Exhibit A: oil’s bull market, the Fed advises, is of small consequence for the central bank. “The rise in energy prices, however, has not notably fed through to core consumer prices,” the Fed statement croons.
Perhaps, although a deeper confirmation, or rejection, will come in tomorrow’s consumer price report for February. Meanwhile, in the here and now, we have the producer price index, which was updated for February and dispatched to the data-hungry masses this morning. As it turns out, core PPI, which excludes energy and food, advanced at a 2.8% pace for the 12 months through February. In case anyone cares, that’s the highest annual pace for PPI since 1995. Adding food and energy only heightens the price momentum, to the tune of a 4.7% advance for the year through last month.
Fed Chairman Alan Greenspan by law must step down on January 31, 2006. But while his official retirement is ten months away, the bond market is openly debating if the maestro has already relinquished his monetary responsibilities.