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Analysis of Market Economics

March 22nd, 2007

USA - Fed meeting : No change in interest rate ( major changes in outlook)

By Rao

The Federal Open Market Committee ( FOMC ) met on 21st March 2007.
The FOMC always releases a statement after their meeting - reflecting the Interest rate decision and their thinking about the future.
Statements are standardized so that there is no room for a mis - understanding by the market.

Comparing statements of the past - to the current statement can give us a clue on how the FOMC thinking is changing and in which direction they are pulling towards.

The expectation of the FOMC meeting and the reasons therefof were posted here prior to their meeting.

Have broken down and then compared the statement released after the Jan’31st 2007 meeting to the current statement. Items in Bold Italics highlight the differences in thinking.

Jan 31st Fed Statement 

  March 21st Fed Statement   Translation / Difference between the two statements 

The Federal Open Market Committee decided today to keep its target for the federal funds rate at 5.25%.  The Federal Open Market Committee decided today to keep its target for the federal funds rate at 5.25%.   
 Recent indicators have suggested somewhat firmer economic growth.    Recent indicators have been mixed .
  •  Pressure on growth possible. 
  • Negative on interest rate hike. 
Some tentative signs of stabilization have appeared in the housing market.   Adjustment in the housing sector is ongoing
  • Stabilization not happened as yet. 
  • Negative on interest rate drop 
Overall, the economy seems likely to expand at a moderate pace over coming quarters.   Nevertheless, the economy seems likely to continue to expand at a moderate pace over coming quarters.  Negative on interest rate drop for now.

Readings on core inflation have improved modestly in recent months. 		 

Readings on core inflation have been somewhat elevated.
  • Inflation – could be coming in. 
  • Negative for interest rate drop. 
Inflation pressures seem likely to moderate over time.However, the high level of resource utilization has the potential to sustain inflation pressures .  Although inflation pressures seem likely to moderate over time - the high level of resource utilization has the potential to sustain those pressures.
  • Inflation could be there but is not expected to hinder GDP growth.
  • Negative for interest rate drop.
 The Committee judges that some inflation risks remain.  In these circumstances, the Committee’s predominant policy concern remains the risk that inflation will fail to moderate as expected.  
  • Inflation could be there. 
  • Negative for interest rate drop
The extent and timing of any additional firming that may be needed to address these risks will depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information.  Future policy adjustments will depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information. Interest rate hikes possible

Conclusion

Is there a tilt towards HIGHER interest rates ??? 

The Q1 2007 GDP results - due on April 27th 2007 - is the key date.

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Posted in United States, Monetary Policy | Comment Here
March 22nd, 2007

Indian money rates - RBI soothes nerves

By Dheeraj

Following the spurt in money market rates, the Reserve Bank of India (RBI) has had to verbally intervene to calm nerves.

An explicit directive that banks can use the funds borrowed under the daily liquidity adjustment facility LAF for onlending purposes has served its purpose of cooling down rates.

This assumes interesting connotations if one juxtaposes the fact that so far the Indian central bank had not taken kindly to onlending of funds borrowed from the LAF window. Guess, different conditions deserve different responses and RBI seems to be adept at that.

The withdrawal of the proposed bankers’ strike has also ameliorated the situation.

While rates for clean borrowing / lending (Call Money) still rule at approximately 20% p.a., it is well off the multi year highs of 70% odd witnessed yesterday. Rates for collateralised borrowing / lending have eased significantly to about 7.75% levels - close to the official repo rate.

Expect further easing in rates as government spending makes its way into the system.

Term money rates are however expected to continue to rule firm as banks’ balance sheet considerations tend to override near term fundamentals.

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Posted in Interest Rates, India, Markets | Comment Here
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