What do you expect to come out of the Federal Reserve meeting tomorrow [March 28]? Most economists are predicting another increase in long-term interest rates. Is that the case for you as well?
I think it’s the same for virtually everyone. I think 99.9% of all the analysts and economists do believe that, but I think I’m looking for something else. Everyone knows they are going to raise rates 25 [basis points] but I’m looking for clues as to when they are going to be finished. I have to admit that I probably will be disappointed. We know that in this environment, they are clearly moving more aggressively in reaction to what is happening in the overall economy. [At the meeting] we’re going to get some more of that, and if they tell us that they are going to look at inflation and economic growth more closely, people will think that they are giving us information, but they really aren’t. We will need to look at the inflations statistics and growth statistics to get clues as to what they are going to do. But I think that we’re going to get a pretty clear signal that the Fed is close to the end [of raising interest rates.] I think the end is one of two tightenings away from this move they’ll release tomorrow.
When do you think we can expect to see the next two Fed tightenings?
I think in the next two meetings we will have possibly one or two more tightenings. My best guess right now is that they’ll probably stop at 5%.
How do you think tomorrow’s meeting will affect equity purchases and fixed income security purchases? Do you expect there will be a slowdown?
That’s a great question because one of the things the markets will be looking for are any clues whether or not they are realistic or misleading as to when the Fed is going to finish raising rates. If the Fed comes out with a hawkish statement indicating that they are going to do a lot more than the market’s expecting, than the market is going to fall off. If the Fed provides a friendly message, than we probably will see the equity markets doing a lot better.
With that said, [Federal Reserve Chairman] Ben Bernanke has promised to be less ambiguous than, some say, he’s been so far. What do you think tomorrow’s meeting will do for him?
One of the things that Bernanke has learned, is that even though the intentions are to be a lot more clear, being more clear sometimes reduces flexibility. Even though the first intention and the first hope is to be very clear and articulate, Ben Bernanke will opt to be less clear than he’d like to be in order to maintain policy flexibility. You probably saw the best example of that in his speech before the Economic Club in New York when people went into that meeting thinking that he was going to be a lot clearer. I think that his intention is to be clear, but in an environment where the policy decisions are so delicate, where the Fed is getting very close to the top, its tough. I think if we would have had one of these meetings a year ago or two years ago, when the Fed was in the early part of their tightening cycle, I think Bernanke could have afforded to be a lot clearer, but as you get closer and closer to the end, being very clear comes at a price because it removes, or reduces, or eliminates so much flexibility.