Wednesday, March 23, 2005

Measuring up monetary policy 

I got this graph from Chart of the Day, showing what has happened to the fed funds rate during economic recoveries and expansions:

I've said in my forecasts heretofore that I thought the fed funds rate would top out this year at 3.5%. I'm beginning to think, looking both at this and yesterday's change in the language of the FOMC statement taking the rate to 2.75%, that I need to up that number towards 4%. The markets are already heading there.

My watch list for the economy right now has expanded then to two parts: Business confidence, which needs to stay strong for this investment-led expansion to carry through; and now mortgage rates. If 30-year rates get much north of 6%, the housing market fears many have will resurface.