by Calculated Risk on 6/11/2008 09:52:00 AM

From Professor Duy: Fed Watch: Between a Rock and a Hard Place

Fedspeak turned decidedly hawkish this week, and market participants responded accordingly, moving up expectations for a rate hike to as early as this August. But is Federal Reserve Chairman Ben Bernanke really ready to follow through? The answer could make or break the Dollar in the coming weeks.

Tim covers the current situation, the recent Fedspeak, the arguments for and against raising rates and keep rates steady - and the politic issues. Duy concludes:

Bottom Line: The Fed has no one to blame for their predicament but themselves. Bernanke & Co. cut rates too deeply, fighting a battle against deflation that never was. Now they are backed into a corner; either raise rates and risk upsetting a very fragile economy, or stay the path and risk the inflationary consequences. If the Fed is truly concerned about the Dollar and commodity prices – and their open talk about currency values implies real and serious concerns – Bernanke will have to follow through with his newfound hawkish side. The bluntness of Fedspeak looks to signal a dramatic shift in thinking on Constitution Ave., and that argues for a rate hike by September, earlier than I had previously expected, and I cannot rule out an August move. Such a move is not without considerable risk for the economy.

The Fed is still data dependent, and unless the economic numbers improve, it seems unlikely the Fed will raise rates. But, as Tim notes, the Fedspeak has turned decidedly hawkish.