Wednesday, October 25, 2006

How The Market Read The Fed

My interpretation of the FOMC Statement is that the Fed believes the economy has past its low so its moderate growth ahead. Moderate keeps the Fed from tightening. Growth means they hold if their forecast comes true and tighten if it doesn't. The likelihood of an ease drops off because when you expect growth you have dismissed housing as a factor that could pull the economy to recession.

Opinions make betting pools and markets interesting. Fed fund futures and Eurodollar futures are alot like betting pools. Given that preamble, the table below, lifted as usual from my colleague Stan Jonas, closes the day at these levels of probability and risk

The Wed column is the close of business, all the others are where the market would be for that array of odds. Wed close is not a bearish view, but clearly a bullish one. Markets now expect no change till the summertime ease.

How the market pulled this one out of its collective hat is beyond me. The natural predisposition for the economy is to adapt and grow. As time goes on, the 5.25% funds rate will have increasingly less impact. The market believes the opposite.

We will both be wrong, of that I am sure. For if there is one thing I do know, it is that there is big thing out there we all don't know that will change everyone's mind.

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