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March 28, 2006
Another quarter point
If you're surprised, you haven't been paying attention. Link to press release:
The slowing of the growth of real GDP in the fourth quarter of 2005 seems largely to have reflected temporary or special factors. Economic growth has rebounded strongly in the current quarter but appears likely to moderate to a more sustainable pace. As yet, the run-up in the prices of energy and other commodities appears to have had only a modest effect on core inflation, ongoing productivity gains have helped to hold the growth of unit labor costs in check, and inflation expectations remain contained. Still, possible increases in resource utilization, in combination with the elevated prices of energy and other commodities, have the potential to add to inflation pressures.
The Committee judges that some further policy firming may 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.
The 2nd paragraph is unchanged from January. The first has some differences. The opening sentence about GDP makes sense, but the "special factors" phrase is a little vague. It sounds as if the FOMC is trying to signal that we could be experiencing a "soft landing." Aside from a couple of minor word changes and the addition of "other commodities" in the sentences about inflation, that portion of the statement is little changed.
Nothing in the press release surprises me (or changes my outlook), but I look forward to the next round of "Fedspeak" to see which way some committee members will be heading as they go forward. Another increase in May appears very likely. After that it's hard to say. "Some further policy firming" allows some flexibility. Just remember, a pause doesn't mean that it's over. As we near the top, there is something to be said for putting twelve weeks between rate increases rather than six. (Sort of like letting up the pressure on the brake pedal of a car as you come to a stop.) But for the moment, the timing of the inevitable pause is still unknown. Stay tuned for the next round of speeches by FOMC members.
Posted by William Polley at March 28, 2006 1:54 PM
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