October 03, 2005

The Federal Reserve raised short-term rates for the 11th time in a row. Our forecast takes a cue from the futures markets. In their statement, the Fed acknowledges that the unfortunate developments surrounding Katrina have increased uncertainty regarding near term economic performance, yet it is the FOMC’s view that these developments do not pose a more persistent threat. Over the next two quarters, the market is looking for the fed fund rates to rise to 4.30% which would translate to two or, quite possibly, three increases in the fed funds rate over that period of time (Figure 1). At the long end, the market is looking for a 50 basis points increase in the 10 year bond yields. That will lead to a 25 basis points flattening of the yield curve.

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