The Federal Open Market Committee released their minutes from their April meeting at 2pm today
Here are the highlights:
They lowered their growth forecast of the economy slightly over the next few years.
They expect higher inflation and unemployment in 2008 and 2009.
They believe "risk is receding" in the credit markets (signals the worst is over in the credit crunch)
They have raised the bar for future rate cuts. Cuts are unlikely going forward even if the economy slows further or contracts slightly. Only a significant weakening in the economic outlook would likely prompt further easing by the FOMC.
So what does this mean for us?
Overall I think there are no surprises, just confirmations. We know unemployment is up and the economy is getting slower and we also know we are going to have inflation because of food and energy and ultimately the costs of producing goods will increase because of these costs.
How to play this in terms of interest rates:
Well the inflation worries is bad for bonds, but since the Fed has acknowledged this bond traders should not sell into this news. The FOMC's revision for core inflation(ex-food and energy costs) went up from 2.1% to 2.3% for 2008. The Fed wants that number in the 1-2% range. In 2009 they predict it will be right at 2.0%, all in all not that bad.
The Fed putting a stop to further rate cuts is good news for bonds; action is taken to keep inflation under control.
The overall economy might not like the rate halting because they want to see further stimulus in the economy. The previous rate cuts have not fully effected the economy yet as it can take between 6 - 9 months for the full ramifications of a rate cut to filter through our economy.
Bonds improved on the minutes and stocks sold off, right now bonds have dropped to the same level they were prior to the news and stocks are still off about 100 points since the minutes were released.