Inflationary pressures are easing and this is a big ship the Fed is steering, almost impossible to get it just right. The pause feels right to most people. Too much more tightening would create fear of a crash and loosening at this point doesn’t seem to make sense at all.

I routinely take classes to the San Francisco Fed. Great learning experience. They have so much cash in their vault, I can’t tell you. It’s stacked five or six tiers high, several hundred feet long and at least 100 feet wide. It’s a warehouse of cold hard cash! There’s tens of billions of dollars there and they take you right to it! Also, you will get a feel for the organization in a way that you can’t get any other way.  Put on your to do list. It’s really interesting.

Currently, the Fed is currently focused on keeping our economic growth going but removing the highly accommodative monetary policy that gave us the lowest interest rates in 40 years. They aren’t stepping on the brakes so much as they are just taking their foot off the gas.  Once that goal is accomplished, the Fed will probably stop raising rates and allow the economy to just roll along until it sees a pattern of it slowing or speeding up and then it will adjust accordingly.  The last series of interest rate hikes weren’t intended to slow the economy so much as just removing the excess and return it to a more neutral environment.  But if they see the economy start to take off, they won’t have any problem at all continuing to raise rates to slow it.

Historically the fed has wanted to avoid haphazard moves. For example, there is surely a zero chance they will do anything at the next meeting because they would appear to have made a mistake at the previous one.

If you look back at rate changes, they usually are in some rational pattern. They pick a direction and go that way until they feel they accomplished their goal, then they go into a wait mode looking for signs. That’s where I think we are now and that will probably last through the election because they don’t want to have any impact on the voters.

I also feel that the housing marketing is going to really take a hit, I just read the first article that used the word “collapse” so it’s starting to get some press, and that will really dampen the economy moving forward and so in my scenario, the fed’s next move will be loosening, probably spring-summer 2007.

I am far less familiar with Bernanke, but I can tell you that Greenspan considered EVERYTHING when making decisions. His modus operandi was to take a bath each morning and read volumes of detailed reports on everything including material that seems so obscure you had to wonder what he was thinking. I assure you, the fed, regardless of Bernankes bathing habits, isn’t relying on only a few factors.

The Fed can rock the markets. They know this and act accordingly. Which includes rocking them when needed. They rarely act between meetings and without notice but when they want the markets to get the message, they move in-between meetings. They did this when the markets were dropping after the dot com bubble. They wanted the markets to recognize that they were lowering interest rates and were not unaware of the situation so they cut between meetings and the market jumped but only short term. It still continued to descend over the next months but slower and much more controlled.

A Federal Funds rate of  3-4% is neutral, and when rates were at 1-2% they were stomping on the gas trying to get the economy going. It wasn’t that long ago they went to 6% to slow the economy. So until they get past 4% we need to consider this a move back to neutral.

The Fed is concerned, for good reason, about the housing sector. But that doesn’t mean they will move because of it. That would be too harmful as it would affect everyone, not just the speculators. If they really want to pop housing, I would think you would hear more about tightening credit controls on second and third homes. That would send the message that it can’t continue and hopefully allow the market to unwind slowly avoiding the precipice that’s approaching.