FOMC Meeting Inspires Germanic Decisiveness

In my previous post about tomorrow's FOMC meeting, I made the case that the outcome would settle some scores given that the spectrum of views is noticably split and that Katrina had raised the stakes. Well, after having the weekend to cogitate on the matter, analysts and observers are as confounded as the German electorate. Bloomberg reports that the median estimate of the 22 primary dealers of US Government debt has moved more toward Fed restraint while in a broader survey of economists, 88% see the Fed continuing its course of rate increases. Each side has its numbers to support its case of course and there won't be any decisive victory in the stats, but, as I argued, this FOMC meeting is about animal spirits. The 'fragile economy' camp is so entrenched in their belief and now they have Katrina. If the Fed continues to see the current expansion as durable even with Katrina, it could be a real shock. If they raise, you can be sure that the high profile dovish analysts will be back-tracking. (William Dudley at Goldman Sachs has gotten ahead of the game here with a recent reversal of his view. Do you think he knows that to get it wrong on the dovish side is the bigger whiff at this point?) And if they raise without a hint of near term moderation in their "measured" pace, the dovish camp is going to have to burn all evidence of their current views and start from scratch. For the inflation hawks and for those who simply take the Fed at their word, a restrained or more moderate Fed is no great screw-up in light of Katrina, whose impact is essentially a statistical mystery.

I have always found that the exciting thing about economics and the capital markets is how events can unfold before our eyes in unpredictable and humbling ways but also how they can intersect to raise and lower stakes in dramatic ways. Potentially, within the span of 2 days the US economy, with the Fed as its proxy, could shrug off a natural disaster of Katrina's magnitude at exactly the same time the Germans show an ambivalence about their economic prospects with unemplyment at 11%. Dollar holders could be looking forward to the prospect of further rate increases while what Euro holders could be looking forward to is anybody's guess. Warren Buffett can afford to hold Euros, but I can't. I'm liking my assets in good old greenbacks right now.