Fed Expected to Stay at 2% Tomorrow But After That, Some Uncertainty

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The Federal Reserve is expected to keep the Federal Funds rate at 2% tomorrow but traders and banks have already anticipated a future rate increase.

The Federal Reserve Open Market Committee meets tomorrow and it's almost certain that they'll vote to keep rates at 2%.  The Fed Funds Rate Predictor puts the probability at almost 90%.

But after that, markets seem to expect rates to rise.  Bloomberg reports that:

"There are widespread expectations among traders for a rate rise in the next three months: There are 36 percent odds of a boost in August and 93 percent in September, according to futures contracts on the Chicago Board of Trade. Economists in a monthly Bloomberg survey through June 11 projected the Fed will keep the rate at 2 percent this year, according to the median estimate."

Bernanke may be one of the reasons. 

"Federal Reserve Chairman Ben S. Bernanke, by voicing concern about inflation and the slumping dollar, has fanned investor expectations for an interest-rate increase as soon as August. He may regret it"

Faced with a weak economy, Bernanke may have to choose between two uncertain options.  William Poole, the former governor of the St. Louis Fed had this to say on Bloomberg TV:

``The issue here is whether the Fed is willing to risk an escalation of inflation and then a bigger recession later, or acts earlier, taking a risk of a smaller recession, but preventing inflation from getting out of hand"

If banks are any indication than they are also anticipating a rate increase.  BestCashCow has received a steady stream of rate increases on CDs over the last several weeks and rates on 1 year CDs are now at or above 4% APY and the rate on 3 year CDs are now at 5% APY.   

 

Sol Nasisi
Sol Nasisi: Sol Nasisi is the co-founder and a past president of BestCashCow, an online resource for comprehensive bank rate information. In this capacity, he closely followed rate trends for all savings-related and loan products and the impact of rate fluctuations on the economy. He specifically focused on how rates impact consumers' ability to borrow and save. He also has authored a wee

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