by Calculated Risk on 8/26/2005 03:33:00 PM

Dr. Duy discusses a wide variety of topics in today's Fed Watch. Dr. Duy thinks it is very likely that the FED Funds rate will reach 4.25% by the December FOMC meeting:

"... I see the calendar as supportive of another 75bp this year - which will come close to cutting the yield curve to zero unless long term rates start to move - and I see no indications from Fed officials to tell me that this story is wildly wrong."

And Duy cautions that the markets may not be prepared:

"... one has to wonder if financial market participants are not entirely convinced that the Fed will continue to raise rates and narrow the spread, or, if the Fed did so to the detriment of the economy, it would quickly reverse course to support financial markets - the "Greenspan put." To me, the latter is not a given this time, especially in an environment of rising energy prices."

Duy concludes:

"... regardless of the possibility of a recession in 2006, I still see the Fed as laying the groundwork for continued monetary tightening, even as they see the possibility that financial markets are not entirely prepared for that outcome."

As usual, a very insightful look at the Fed's World View.

Dr. Duy's post: Fed Watch: Forecast Calls For More Rate Hikes