Expectations of FOMC Meeting at the Fed

JB expectations: unchanged interest rates

Market expectations: unchanged interest rates

In favour of unchanged interest rates:

• growth is slowing down
• commodity prices have fallen
• problems in the financial sector

In favour of an interest-rate hike:

• inflation is still too high
• the likelihood of a lengthy and deep recession has been reduced

A meeting is scheduled at the Federal Open Market Committee on Tuesday, 5 August, and we expect the committee to hold interest rates. Over the past months, there have been speculations whether the Fed is done cutting interest rates this time around and even contemplates raising interest rates. This has not happened yet, and the market has moderated its expectations of interest-rate hikes as the economic indicators have begun to point to lower global growth and commodity prices have generally fallen. However, there are still expectations that the Fed will raise interest rates by a quarter point before the turn of the year and twice in mid-2009. At the time of writing, the odds are only around 10% that the Fed will raise interest rates on Tuesday according to the market.

Bernanke's speech to the Congress on 15 July was very interesting since he was more concerned about growth than previously. However, there have been contradictory signals from the Federal Open Market Committee which appears to be divided. On one side is the Board of Governors with Bernanke at the helm who favours holding interest rates. On the other side are several of the Federal Reserve Bank presidents who want to fight inflation.

There are still liquidity problems in the financial sector. Together with the ECB and the SNB, the Fed has this week extended the swap facilities between the central banks and also (in brief) extended the possibility of borrowing against security at the central banks from 28 days to 84 days. However, in our view this will not necessarily have a major effect on the liquidity. It is still a crisis of confidence among banks, and not all banks can borrow from the central banks. If the banks which can borrow do not pass on the liquidity to the smaller banks, the problems are not solved. Generally, the situation is not too good when it is necessary to extend the facilities. In our view, we will not see an improvement until the Q3 accounts from the large banks, at best

FACTS

Date: 5 August

Interest-rate announcement: 20:15 p.m.

Jyske Markets - FX Research http://www.jyskebank.dk/finansnyt

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