–Some Eye Fed Tightening As Soon As September 2010
–Discount Rate/Fed Funds Spread Still Debated

By Alyce Andres-Frantz

CHICAGO (MNI) – A survey of the chief economists at the U.S.
primary dealerships expect either the same or minor tweaks to the
Federal Open Market Committee meeting statement April 28.

The main focus for a long while has been on the phraseology
“extended period” which is a reference to time frame for exceptionally
low rates.

Bob Mellman, managing director of U.S. economic research at JP
Morgan told MNI, “We do not expect any substantive change in the
language.”

Steven Ricchiuto, chief economist at Mizuho said the “extended
period” language will be maintained. However, a shift in the statement
language should “reflect the uptick in employment and the rise in retail
activity.”

Joseph LaVorgna, managing director and chief U.S. economist at
Deutsche Bank, also expects the Fed will maintain the “extended period”
terminology “but find some way to tie it into the data rather than keep
it as an open ended commitment.”

Tom Porcelli, U.S. market economist at RBC anticipated no change in
the Fed language citing Federal Reserve Chair Ben Bernanke’s most recent
statement to the Joint Economic Committee Wednesday. “As Bernanke said,
there are a number of challenges that require the funds rate to stay
low”

Bernanke told the JEC that while economic conditions have improved,
weakness in the U.S. housing market and bank lending remained a strain
on the domestic economy.

While the prepared testimony failed to mention rates, Bernanke
reiterated “extended period” in response to questions.

Nonetheless, economists at Goldman Sachs said Bernanke’s “silence
on the issue in his prepared remarks will likely keep expectations alive
that a change could occur at this next meeting, even though his general
take on the economy, and especially inflation, does not suggest that
he’s feeling any urgency about changing the language. On balance, we do
not expect a change.”

Meanwhile, Mizuho’s Ricchiuto told MNI, “the purpose of the
testimony was to talk about the economy and the budget and that is what
he did.”

Mike Moran, chief economist at Diawa said Bernanke’s void of a rate
comment in his written JEC testimony “Opens a door to possible change in
language.”

DB’s LaVorgna took Bernanke’s testimony as a signal that “He’s open
to a change.”

Porcelli said the JEC testimony still implied “low for long.”

JPM’s Mellman said, “I think that Bernanke meant to talk on the
economy and not on rates. In our mind, the last Fed minutes are the
latest Fed thinking about policy, and they are still low for long.”

The minutes from the March 16 FOMC, released April 6, said: “A
number of members noted that FOMC expectation for policy was explicitly
contingent on the evolution of the economy rather than on the passage of
any fixed amount of calendar time. Consequently, such forward guidance
would not limit the FOMC’s ability to commence monetary policy
tightening promptly if evidence suggested that economic activity was
accelerating markedly or underlying inflation was rising notably;
conversely, the duration of the extended period prior to policy firming
might last for quite some time and could even increase if the economic
outlook worsened appreciably or if trend inflation appeared to be
declining further.”

The Fed minutes also suggested that a few members thought Fed
tightening was more likely sooner.

Looking ahead, Mellman said, “With core inflation this low, we do
not think that the Fed will start to raise rates until April 2011.”

Economists at Goldman do not forecast any change in policy through
2010 and more than likely through 2011.

Porcelli said rate hikes from the Fed are now targeted for fourth
quarter “at best,” but added that the risk is for hikes in the first
quarter of 2011.

LaVorgna said he looks for rate hikes starting in August 2010 while
Moran from Diawa eyes Fed tightening in September 2010.

Meanwhile, Ricchiuto expects a language change at the June meeting.

Normalization of the spread between the Fed funds rate too has been
a hot topic.

Mellman said, “There is no way to know the timing of the next
discount rate increase, if there is a further increase in the spread.”

Ricchiuto, meanwhile, said he looks for a change in the discount
rate following changes to the ‘extended period’ language while LaVorgna
aimed for mid-July.

However, Porcelli questioned whether or not the spreads between the
Fed funds and discount rate matters.

“There is an utterly small amount of discount window loans, the DR
is not tied to any other key rates, and the Fed has told us they want to
normalize this spread,” Porcelli said.

“We think there is too much focus on when they will move this
rate,” primarily on the timing of such a move, Porcelli said.

–email: aandres@marketnews.com

** Market News International Chicago Bureau: (708) 784-1849 **

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