Breakdown of gold-oil price ratio is huge evidence of price manipulation

Section:

A debate stirs about the FOMC;
Some analysts think Fed may hold rates steady Tuesday

By Gregory Robb
CBS Marketwatch.com
Monday, August 9, 2004

http://cbs.marketwatch.com/news/story.asp?guid=%7B7ABF8139%2D9AA0%
2D4C46%2D96EA%2DDA9A8B99DA01%7D&siteid=mktw

WASHINGTON -- Although they are still badly
outnumbered, some economists are beginning
to question the perceived market wisdom that
the Federal Open Market Committee will raise
interest rates Tuesday.

Evidence that the economy may be faltering,
especially the weak July jobs report, may give
central bank policymakers pause, they argue.

The most prominent member of the "hold" camp
is Lynn Reaser, chief economist at Bank of
America Capital Management.

She said the poor employment data "will likely
cause the Fed to keep the target fed funds rate
at 1.25 percent, pending assurance that the
recent pause in economic growth is only
temporary."

Reaser doesn't think the Fed will be on hold for
long. She still expects the federal funds rate to
reach 2.0 percent by the end of the year.

But for an FOMC that has promised to be
gradual, Reaser said that now is the time for
patience.

The conventional wisdom on Wall Street is that
the Fed will go ahead and raise its target for
overnight loans by a quarter percentage point to
1.5 percent. These analysts expect the FOMC
to signal in its statement that it may be prepared
to hold rates steady until after the presidential
election -- skipping a rate hike at the Sept. 21
meeting.

This thinking is reflected in the fed funds futures
contract.

"Despite the awkward timing, the Fed's clear
confidence in the outlook and belief that policy
is overly accommodative warrants a 25 basis
point move in August," said Richard Berner and
the economic team at Morgan Stanley Equity
Research.

After all, Federal Reserve board chairman Alan
Greenspan told Congress only three weeks ago
that the economy had hit a "soft-patch" in June
that should prove "short-lived."

Many economists still believe that inflation is a
bigger threat to the recovery than slow growth.

"We would hope that the Fed would still raise
rates gradually, even if employment growth is soft
in August, since we agree that monetary
accommodation threatens higher inflation down the
road," said John Ryding and the economic team at
Bear Stearns.

But Reaser isn't alone in her forecast.

Lou Crandall, chief economist for Wrightson ICAP,
said the July jobs report "was jarring enough" to
affect the outcome of Tuesday's FOMC meeting.

"We think there is less than a 50-50 chance that
the Fed will tighten on Tuesday," Crandall said.

Robert Brusca, chief economist at FAO Economics,
said the Fed has the built-in excuse of higher oil
prices to change its mind.

"That is why I think the Fed will not hike rates on
Tuesday as it had previously planned. I don't care
what the Fed funds contract says. I think the Fed
has to teach those trading that contract to pay
attention to world events whenever they happen,
even on the threshold of a Fed meeting," Brusca
said.

Michael Panzner, equity trader at Rabo Securities
and the author of 'The New Laws of the Stock
Market Jungle,' said the Fed is "now stuck between
a rock and a hard place."

"On the one hand, if the central bank moves to slow
down the pace of -- or even puts a halt to -- future
rate hikes, it risks creating the unsettling
impression that conditions are much worse than
what they have been acknowledging," Panzner said.

"On the other hand, if Greenspan and company
choose to go ahead as originally planned, there is
a good possibility that they may end up exacerbating
the extent of any downdraft that might now be
unfolding," he said.

Complicating the outlook a bit was a Wall Street
Journal story on Friday quoting unidentified Fed
officials saying that the Fed would stay on a patch
of steady rate hikes no matter what the July jobs
report showed.

Some economists believe that Greenspan likes to
signal his intended monetary policy at upcoming
FOMC meetings to a small group of favorite
reporters, including the Journal.

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