With Inflation Tame, Fed Will Hold Rates

I've been wrong before but I think it is safe to say that at their meeting on May 9th the Federal Open Market Committee (FOMC) will find it in their hearts to hold rates steady at 5.25% for the seventh straight meeting. After the Fed's two day meeting on March 20th-21st rates were left unchanged and the markets threw a party. While I don't expect to see the market react quite so jubilantly this time, I do believe the Fed is in a 'wait and see' mode that probably won't change in the near future.

Ben and the rest of the Fed members are focused on two things right now:

1. Inflation (ex-inflation): Inflation has been above the Fed's comfort level for quite some time now and the moderation they have predicted has failed to materialize. The "core" price index (sans food and energy, "inflation ex-inflation" in Ritholtz-speak) was up 2.1% in March, compared with 2.4% the month before. Remember the Fed's "comfort level" is 2%, so while 2.1% was a positive development the Fed will likely still call this "elevated." Be that as it may, 2.1% is still cause for minor celebration and took a lot of the mystery out of the Fed decision next week.
   
2. Unemployment: Big Ben wants to see unemployment tick up signaling further slowing of the economy. What Ben has gotten thus far is slower growth and lower unemployment. The danger, according to the WSJ, is that "growth in productivity, or output per worker, has slowed. That would mean companies would have to hire more workers for a given increase in sales. If those companies raised wages to attract those workers -- as they have lately -- they would face a choice between raising prices and accepting narrower profit margins." In other words, slowing productivity could lead to . . . you guessed it, inflation! Everyone knows we don't want that, so let us all hope that more Americans were laid off this month so that the unemployment number ticks up to 4.5 or 4.6% when released tomorrow morning (I love jobs, just not when the Fed is worried about productivity!).

Source: "Fed Likely to Stand Pat on Rates"
Author: Greg Ip