This is a sample of the high-level discussion in late July 2008:
Following the collapse of Fannie Mae (FNM) and Freddie Mac (FRE), Ben Bernanke’s Congressional testimony last week had Fed watchers predicting interest rates would remain flat, or possibly fall, by the end of the year.
But surging share prices last week and tough talk from two FOMC board members has delivered an expectations U-turn.
According to interest rate futures, investors had priced in a 42 percent chance of a 2008 rate hike following Bernanke’s testimony. But after falling oil prices and not-as-horrible-as-expected earnings from banks drove stocks higher through Thursday, a hike by year-end had been fully priced in by finicky investors.
Then on Friday, Minneapolis Fed President Gary Stern said that the Fed couldn’t wait for the double-threat posed by jittery housing and financial markets to subside in order to fight higher inflation. In similar remarks, the Philadelphia Fed’s Richard Plosser said this morning that rate hikes should be expected “sooner rather than later.”
All of this has helped push up the expectations of higher rates even further with a hike by October almost fully priced in at 90 percent.
What it in fact helped push was the “ball over the edge”.
You want more money? But I won´t give it to you! So while velocity was tanking (money demand soaring) the Fed thought it proper to pull in supply.