Current events conspire to give us a much longer period before the Fed acts for many reasons, among them are the severity of the downturn and the damage to consumer balance sheets. Waiting for a 6% increase in utilization rates means taking away monetary stimulus when usage is still below the lows of the previous recessions. With inflation far from a problem and export growth a priority, the Fed is going to want more than a 6% increase in usage before the tightening cycle begins anew.
The January 2011 Fed funds contract is trading at 98.56 implying an average effective funds rate of 1.44% or about 120 basis points above current levels. You can look at the forward rates implied in the Treasury yield curve and find similar expectations of Fed tightening. Seems to me the market is way off base. It will be 2012 before the tightening cycle begins.
|Capacity Utilization & When The Tightening Cycle Begins|
|Recession's End Month|
|Fed funds Rate||5.6%||5.5%||9.2%||6.1%||2.1%||0.2%|
|Months To First Rate Hike||16||24||7||38||32||??|
|Capital Utilization %Ch||7.5%||12.5%||3.6%||5.9%||5.6%||6.0%|