Market to the Fed: Read My Lips

So the Fed, according to all the evidence, is very attuned to "market expectations," placing much weight thereon in their determination of Federal Reserve policy. (See my previous post citing Fed Governor Mishkin on the subject: "I believe that inflation expectations will play a primary role in determining the course of inflation.")

Well, it looks like the market has heard Mr. Mishkin loud and clear. The Fed doesn't have to go very far to read market sentiment (read "wishing thinking"), because the market has decided to let their sentiments be known. In a recent article at Bloomberg by Daniel Kruger, we learn that:

"Federal Reserve Chairman Ben S. Bernanke's assertion that interest rates may need to increase to curb inflation is wrong. That's what Goldman Sachs Group Inc., Merrill Lynch & Co. and UBS AG are saying. While Bernanke warned last month that the odds of worsening inflation have increased, chief economists at the three firms say the worst housing slump in a decade may drive the U.S. economy into a recession and stifle consumer prices. Their chief economists say the Fed will cut its target for overnight loans between banks at least three times this year."

That's pretty specific. Three rate cuts between now to December are what the market is expecting.

We'll just have to wait to see if the Fed is listening or whether the Governors will decide to prove to the marketplace that they're not just windmills.



[Thanks to alldressforms.com for the photo.]