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March 22, 2005
Another thought on the FOMC
In a nutshell here's what's been bugging me about the wording of the press release today and the media and market response to it.
People are treating this as if the Fed's stance in this press release is aggressive towards inflation and as if that aggressiveness and the warning of inflation is the reason for the bond market taking a dive.
I see in that press release the word "contained" twice as it relates to inflation. I see only one mention of inflation pressure picking up. I see the word "measured," which suggests to me that the rate increases will be 25 b.p. at a time. I see them say, "the upside and downside risks to the attainment of both sustainable growth and price stability should be kept roughly equal."
There's not much in there for inflation hawks, despite what everyone is saying. I think that is what the bond market is worried about. If the word "measured" had gone, then perhaps the hawkish ones would take comfort in the fact that a 50 b.p. increase is coming. (Note: I am not advocating a 50 b.p. increase at this time, I'm just trying to understand market sentiment. And clearly there are a significant number of market participants who expect and/or want 50 b.p. sometime before the end of summer.)
I don't see a 50 b.p. increase in the cards for the next meeting. Up to very recently, some did. That's what I think has the bond market reeling. Some in the bond market are perhaps a bit disappointed that we will have to continue hearing the word "measured" for another six weeks and a more aggressive rate hike is pushed further in the future.
Otherwise, is there really any information in that press release that we didn't already know? Why should this have caused such a sudden spike in the 10 year yield? Anyone who read the last meeting's minutes knows that firms are more able to pass on price increases to the customer. That's all the press release said.
No, I think the bond market fears that the Fed is risking falling behind the curve and that they are waiting until inflation appears rather than being proactive. Being "measured" is not being proactive. I think this was a failure to meet expectations.
We might know more in the morning when the CPI is released.
Posted by William Polley at March 22, 2005 7:41 PM
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