by Calculated Risk on 5/08/2006 10:48:00 PM

Every week Dr. Altig calculates the market expectations of future federal funds rate hikes based on the options on federal funds futures. This weeks post is especially interesting. Expectations are for another 25 bps this Wednesday and then for a pause, at least through the August meeting.


Click on graph for larger image.

This graph shows the daily odds of various Fed Funds rates after the August 8th meeting.

An extended pause is somewhat surprising since most of the recent economic data has been fairly positive. Even the data for the housing market hasn't been terrible - and the housing slowdown hasn't impacted employment significantly yet.

Inflation also appears to be moving higher - as an example the Dallas Fed's trimmed mean PCE inflation rate was an annualized 3.7% in March and 2.4% over the last 6 months - above the high end of the Fed's informal target of 2.0%.

For the FED to pause, they must expect housing will weaken further in the near future. There were a couple of commentaries today suggesting that the housing slowdown is spreading: see Dimartino: Bubble's bursting on all fronts and Housing slowdown appears to be spreading nationwide. Further evidence of a housing slowdown was provided after market hours by Dominion Homes, when they reported a Q1 loss:

Douglas Borror, chief executive officer of the company, said, "Based on the level of sales we are currently experiencing, we do not expect that 2006 will be a profitable year."

I think there might be another rate hike in June unless inflationary pressures ease.