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May 3, 2005
FOMC issues a corrected statement
Yes, I thought it was a little odd that the statement that came out at 2:15 EDT lacked a sentence about long term inflation being contained. I thought maybe they were trying to sound like they were playing to both sides. There was a mention of the slowing economy but also a tacit acknowledgement of creeping inflation. This was followed by a conditional outlook. A whiff of stagflation? It was a question worth pondering. I started to see headlines on the 'net that stocks were falling on the news. Bonds appeared to hold steady. I began composing a post in my head that I would call "Bond market keeps its head."
And then, this. In the first ever "oops!" of this kind, the FOMC corrects itself saying it left out the sentence about long-term inflation being well contained.
I don't know exactly when the announcement of the corrected press release came in (anyone?), but I looked at the intra-day 10 year yield and I'm guessing it was close to 4pm EDT. As of now, the bond is up 6 ticks and the yield is at 4.16%. I'm thinking it might still give a little of that back--it was up 8/32 for a while. Interesting little episode, but I don't think there's much to make of it other than illustrating to our students just how tightly wound the bond market is right now.
The press release wasn't bad to begin with, and adding back that sentence (which has been there before) makes it marginally better. I'm definitely not as bewildered by the bond market as I was in March. The 10 year might be a little overvalued for my blood, but at least they didn't react the way they did last time. For the most part, the market did keep it's head today in a collective sense.
And I think that this statement keeps the door open to a faster or slower pace of monetary adjustment as needed. If you've been watching the intermeeting data, nothing in this statement should surprise you. The acknowledgement of the "soft patch" comes here:
Recent data suggest that the solid pace of spending growth has slowed somewhat, partly in response to the earlier increases in energy prices. Labor market conditions, however, apparently continue to improve gradually.
Special note to my intermediate macro students: This language is pretty close to what we discussed this morning.
Oh, I should mention that today is the last day of classes at Bradley University before finals start. As I have done for the last couple years, I led my intermediate macro class in a simulated FOMC meeting on the last day of class that coincides with an actual meeting day. When it also happens to be a the last day of class, it's a great way to end the semester.
They did a fantastic job.
Note to macro professors: For a good description of an FOMC simulation, see this paper by Scott Simkins. If you actually try to do the simulation it would be worth reading A Term at the Fed by Laurence Meyer for a detailed description of what goes on in a meeting.
And so now all eyes turn toward Friday and the April employment report.
Posted by William Polley at May 3, 2005 3:39 PM
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Comments
What a strange day of statements. At first I thought the Fed was trying to do two things - leave the word measured in the statement to calm markets but essentially dropping it by indicating that inflationary expectations may no longer be anchored. I was writing up a post about the more aggressive posture indicated by this statement when the correction came out. Delete! Now I want to see the minutes. You always do a good job wading through these and giving a nice interpretation so I'll be watching for your take on the whole "measured" language issue and the posture the minutes indicate.
And thanks for the links!
Mark
Posted by: Mark Thoma at May 3, 2005 6:28 PM
Well, it's no secret that I'm not a fan of the word "measured" in these statements. But every time it's used it gets harder to take it out. So I think it's probably in until there is actually a change in the direction of policy.
The market has, I think, built in another 3 or 4 moves, 25 basis points at a time--unless something happens to move us off that path. Much lower GDP growth or extremely week payrolls would move us one direction. A succession of strong payroll reports and higher inflation numbers would move us in the other direction. But if we keep getting GDP in the 3-4% range, inflation under 3.5% year-on-year, and payroll growth that bounces around either side of 250,000/month (these of course are just numbers off the top of my head that look reasonable given where we are and where we've been).... then we're going to keep going up one quarter point at a time.
In other words, I'm not sure we're going to get 6 weeks notice of any change the direction of monetary policy. Maybe Greenspan's semi-annual testimony (which I believe comes in July) or Q2 GDP (end of July) will give us a clue. If a change is coming, we'll probably have to infer it from incoming data or FOMC member speeches. I don't think it will be in the press releases at this point in the cycle. Too risky.
Posted by: William Polley at May 3, 2005 9:57 PM