Today at 2:15pm, we'll learn if the Federal Reserve Board will decide to increase, decrease or do nothing to the Federal Funds Rate. Let me spoil the surprise for you: they're going to leave it alone.
Bloomberg likes to keep track of what the market predicts for certain events. For the Fed Funds Rate, that command is FFIP [go], in case you're at a Bloomberg terminal and would like to see. We don't have one here at The Atlantic, but a friend at a bank tells me that, as of yesterday late afternoon, the probability breakdown was as follows:
No Change: 88%
25 Basis Point Decrease: 12%
25 Basis Point Increase: 0%
Currently, the Fed Funds rate is mysteriously listed as being somewhere between 0% and 0.25%. Rightly, no one believes that the Fed is dumb enough to raise rates at this time. But I'm perplexed who believes they would decrease rates. After all, the range the Fed claims the rate is at now includes 0%. I am guessing that 12% thinks the Fed will say, "Okay, it's just 0% now." Why bother, if that's already within the range?
So I'll have to side with the 88% majority on this one who predict no change. This is also supported by the fact that, as bad as the economy still is, it does not appear to be getting all that much worse. As a result, I find it highly unlikely that the Fed would decide to lower rates as a mostly symbolic effort just to say the rate is now only 0%.
But what about the rest of the year? According to an article also from Bloomberg yesterday afternoon:
There's a 40 percent chance the Fed will raise interest rates by at least a quarter-percentage point to 0.5 percent by December, fed funds futures showed today. The odds were 49 percent a week ago.
Why is there a 40% change for an increase? Some believe the Fed will be worried enough about inflation to increase rates. I'd bet on the 60% chance for no change here as well.
I expect inflation too, but I don't expect it to begin manifesting itself in a major way until 2010. Meanwhile, I expect unemployment to continue to increase through the end of the year. So if unemployment is toying with entering the teens in November or December, I highly doubt a fear of future inflation will be strong enough to overshadow intense political pressure on the Fed to leave rates steady. As a result, I would expect some very boring Federal Fund Rate decisions throughout the rest of the year.