360 Degrees on the FOMC

Editor's Note: This edition of "360 Degrees" examines the Federal Open Market Committee's decision to raise official interest rates to 5% Wednesday. The following is a sample of the expert commentary and dialog on the subject Wednesday on RealMoney before and after the announcement.

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Bernanke Walks the Thin Line, by Liz Rappaport

Little changed in the FOMC's statement Wednesday, but the Ben Bernanke-led Fed accomplished the difficult task of providing something for each of its varying constituencies.

Bond market vigilantes took the policy statement as not hawkish enough, and stock market bears were similarly distraught. But the statement contained enough backbone to stem the dollar's recent decline and simultaneously provide hope to those expecting a pause at the June meeting. Given the breathless anticipation of the statement, the Fed deserves credit for crafting a statement that was all things to different people and didn't prompt major upheaval in the financial markets.

Of course, the Fed could be seen as having merely delayed the inevitable and leaving investors pretty much where they were prior to the March meeting. The debate now turns to whether the Fed will hike rates again in June or pause after collecting data.

"The Fed stated it will be taking its cue from the market more than it has in the past," says John Lonski, chief economist at Moody's Investors Service. "If forthcoming data is going to be inflationary and bond yields rise, the Fed tightens. If the market does not believe data indicates an increase in inflation risk, it will enter into a pause that may well continue into a stop."

The bond market, which is keenly sensitive to inflation, felt the statement didn't go far enough. The yield on the benchmark 10-year rose to 5.13% from 5.10% before the meeting.

"We hope the Federal Reserve will be an inflation-fighter and preemptively thwart off many of the mounting inflation pressures by raising its overnight borrowing target," says Richard Yamarone, director of economic research at Argus Research Corp. "But hope isn't a strategy, it's an emotion. In the event the Fed does sit sidelined, we believe the bond market will step up and do the Fed's work for them."

Stock market bears were similarly distraught, even if the stock market itself had a fairly muted reaction to the statement and the recent trend of outperformance by blue chips continued.

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The Fed Should Pause, by Bob Marcin

I continue to believe that the Fed should pause after raising rates to 5% today. Now, many believe that they should continue hiking, citing commodity prices and strong growth as fundamental reasons.

Those same individuals probably cheered the 1% fed funds rate. I think that rampant inflation is as probable today as deflation was two years ago -- not very.

I know gold is $700. I know that oil is $71. But a 6% fed funds rate will not stop commodity speculation. It might just trash the real estate market further. And today's purchase-mortgage apps were downright ugly.

Despite Larry Kudlow's incessant characterization of the current economy as booming, economic tops are set under those conditions. Things will slow in the next few quarters, and noticeably, in my opinion.

Unit-labor costs remain controlled, and many consumer companies are having a difficult time passing on material-cost increases. If the Fed wants to do something about commodities, it should jawbone the commodity exchanges into dramatically hiking margin requirements. That might take some pressure off inflation without hurting the real economy.

It's what I proposed for stocks in the technology bubble, but was never implemented. The Fed ignored that bubble, it should not ignore the commodity one.

If inflation accelerates from here, the Fed can always resume rate hikes. However, if it raises too much, it risks a major problem with this very levered economy. The downside of hiking too much far outweighs the downside of pausing too early. It should give all of the restrictive forces in the economy time to slow economic growth.