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February 23, 2005
January CPI and Fed minutes
Angry Bear and macroblog provide today's commentary.
The market cheered a little bit anyway.
Oh, and what's this? I almost forgot. From the Reuters article linked above:
Markets will look for the release at 2 p.m. (1900 GMT) of the Federal Open Market Committee's minutes from its Feb. 1-2 meeting for clues about future rate hikes.
I'm going to read the minutes. Expect an update to this post within an hour or two.
UPDATE: After the procedural part of the minutes:
At this meeting the Committee engaged in a broad-ranging discussion of the pros and cons of formulating a numerical definition of the price-stability objective of monetary policy. A staff presentation on the topic included a review of the potential costs and benefits of introducing such a definition as well as of other countries’ experiences. In the subsequent discussion, meeting participants uniformly agreed that price stability provided the best environment for maximizing sustainable economic growth in the long run, but expressed a range of views on whether it would be helpful for the Committee to articulate a specific numerical definition for the Federal Reserve's price-stability objective––either a single figure or a range. Those who believed such a move would be on balance beneficial cited, for example, its usefulness as an anchor for long-term inflation expectations, as a vehicle for enhanced clarity of Committee deliberations, and as an additional tool for communications. Several of those who saw greater potential drawbacks were concerned that such a shift might appear to be inconsistent with the Committee’s dual mandate of fostering maximum employment as well as price stability or that it might inappropriately bias or constrain policy at times; in any case, with inflation expectations well-contained over recent years, the benefits of announcing a specific inflation objective were not likely to be large. The Committee decided to defer further discussion.
Too bad we have to wait 5 years for the transcripts.
The committee also seems to feel that inflation is being held in check for now.
Core consumer prices decelerated over the past few months, while overall consumer prices were buffeted by movements in energy prices. The rate of increase in core prices in the twelve months ending in December was somewhat higher than the very low rate that prevailed during the year-earlier period; the overall index also accelerated, with about half of its advance accounted for by a sharp rise in energy prices. Measures of inflation expectations were little changed over the intermeeting period. With regard to labor costs, the employment cost index decelerated in the fourth quarter; the slowdown was attributable to wages, which gained only slightly, while benefit costs rose a bit faster than in the third quarter.
And you knew that they would mention this...
The Committee’s decision at its December meeting to increase the federal funds rate had been fully anticipated in financial markets, and reaction to the attendant statement was muted. The release of the minutes of the December meeting on January 4, however, triggered a significant upward revision in the anticipated path of monetary policy: Investors apparently read them as expressing more widespread concern among Committee members about inflation pressures than had been the case previously. Market participants viewed the generally favorable incoming data on economic activity as consistent with their expectations of firmer policy. Interest rates on intermediate-term Treasury securities rose in response to the revision to policy expectations, but longer-term yields were little changed over the intermeeting period.
The forecast for '05 and '06:
As part of its continuing effort to improve its communications, the Committee had earlier decided to add one year to the forecast period so as to make the projections more useful to the public. The forecasts of the rate of expansion in real GDP were concentrated in the upper part of a 3½ to 4 percent range for 2005; for 2006 the forecasts were in a slightly lower range of 3¼ to 3¾ percent, with a central tendency at 3½ percent. These rates of growth were associated with a civilian unemployment rate in the range of 5 to 5½ percent and a central tendency of 5¼ percent in the fourth quarter of 2005 and 5 to 5¼ percent in the fourth quarter of 2006. The rate of inflation, as measured by the core PCE price index, was expected to remain fairly stable, with forecasts concentrated in the lower portion of a 1½ to 2 percent range for both this year and next.
This is the only thing I could find that expressed any concern about inflation. It's near the end, and makes me wonder if the regional banks are more hawkish than the board at the moment.
However, several participants suggested the possibility of an upward skew to the distribution of inflation outcomes, especially if there were appreciable further declines in the foreign exchange value of the dollar or in structural productivity growth; already some participants were hearing anecdotal reports from firms of an increased ability to pass cost increases through to product prices, perhaps because of increasing confidence in the outlook for the economic expansion.
I would think that the participants who are hearing anecdotal evidence from firms are the bank presidents.
This sums it up:
All members judged that a further quarter-point firming in the target federal funds rate was appropriate in light of current overall accommodative financial conditions and the continuing outlook for solid economic growth and diminished slack in resource utilization. A higher nominal federal funds rate was seen as needed to contain risks of increased cost and price pressures, but even with this action, the real federal funds rate was generally seen as remaining below levels that might reasonably be associated with maintaining a stable inflation rate over the medium run. The pace of policy moves at upcoming meetings, however, would depend on incoming data.
Most of this we knew already.
UPDATE: The status quo is apparently good. A market strategist quoted in the article says,
There's nothing in here when I read these things that jumps out at me and strikes me as something different or new.
Yeah.
UPDATE: Yet another article, here the writer feels that the minutes indicate more tightening, which would be good for the dollar. Maybe, but this is not "news." The minutes say clearly that
The pace of policy moves at upcoming meetings, however, would depend on incoming data.
In other words, expect 1/4 point at each of the next three meetings unless we get some signals to quicken or slow that pace. Today's CPI numbers did not contain such a signal, in my opinion. The current pace of rate hikes seems consistent with the amount of inflation pressure evident in today's data.
Posted by William Polley at February 23, 2005 1:50 PM
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