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December 13, 2005
"Measured policy firming"
Bye-bye "measured pace". Bye-bye "accomodation". Hello "measured policy firming". Here's a link to the full FOMC statement, but I am going to quote the two important paragraphs in full. For the record, the FOMC did once again raise the funds rate by 25 basis points.
Despite elevated energy prices and hurricane-related disruptions, the expansion in economic activity appears solid. Core inflation has stayed relatively low in recent months and longer-term inflation expectations remain contained. Nevertheless, possible increases in resource utilization as well as elevated energy prices have the potential to add to inflation pressures.
The Committee judges that some further measured policy firming is likely to be needed to keep the risks to the attainment of both sustainable economic growth and price stability roughly in balance. In any event, the Committee will respond to changes in economic prospects as needed to foster these objectives.
For reference, here is the last statement from Nov. 1.
Elevated energy prices and hurricane-related disruptions in economic activity have temporarily depressed output and employment. However, monetary policy accommodation, coupled with robust underlying growth in productivity, is providing ongoing support to economic activity that will likely be augmented by planned rebuilding in the hurricane-affected areas. The cumulative rise in energy and other costs has the potential to add to inflation pressures; however, core inflation has been relatively low in recent months and longer-term inflation expectations remain contained.
The Committee perceives that, with appropriate monetary policy action, the upside and downside risks to the attainment of both sustainable growth and price stability should be kept roughly equal. With underlying inflation expected to be contained, the Committee believes that policy accommodation can be removed at a pace that is likely to be measured. Nonetheless, the Committee will respond to changes in economic prospects as needed to fulfill its obligation to maintain price stability.
Unlike past statements where the change of a word or two could be highlighted, this is a substantial rewording.
In particular, the 2nd paragraph puts the focus less on price stability per se. I suppose that will rattle a few chains. The 2nd paragraph sounds more like it is paving the way for a temporary pause in the action with words like "...some further measured policy firming is likely to be needed..." (emphasis mine). Keeping a "measured pace" for so long heightened the possibility of the committee painting themselves into a corner. This language gives them a way out while still maintaining the ability to press on with higher rates if inflation continues to pose a threat. It may take the market a couple days to sort it out, but at first glance, this language could work. I would still like to see it evolve, however.
The first paragraph now contains an inflation warning, "Nevertheless, possible increases in resource utilization as well as elevated energy prices have the potential to add to inflation pressures." Hawkish? Maybe, but that sentence has some qualifiers in it. Again, the tone throughout the statement seems to be one of paving the way for an eventual pause in the rate hikes while maintaining vigilance against inflation.
Enough of what I think. What does the bond market think? At the moment, the bond market is satisfied. They seem to be taking the news well. The 10 year price is up 7/32 as I write. They don't seem to think that the Fed suddenly turned into a dove with this statement. With that as an objective measure of the success of the new language, I'd have to give it a passing grade, perhaps a B+ (lest I be accused of grade inflation.)
UPDATE: For more see: Economist's View, The Big Picture, and possibly more to be added later.
Posted by William Polley at December 13, 2005 1:18 PM
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