I've been quiet about the FOMC meeting lately since there really hasn't been anything to shake my opinion of what will happen tomorrow. I think a quarter point is pretty much a given, and "data dependent" is the new "measured pace". I expect that the announcement will retain most of the usual language with maybe a marginally thougher tone towards inflation. Barry Ritholtz has a discussion going about whether they might go with more than a quarter point. While it is entirely possible to form an academic argument as to why 50 b.p. might be needed, it is much, much harder to imagine it actually happening in the current environment with an economy that is good but not great, a nervous stock market, and comments from Fed officials that have not exactly telegraphed a 50 b.p. rise.
That said, I have already indicated my unease with the thought of the nominal funds rate merely keeping up with accelerating inflation. Then the danger is that people will start to think that this is more than just a transient spell of inflation and longer term inflation expectations would be pushed upward. A rise in inflation expectations is both a symptom of troubles that have been brewing and a problem for the Fed going forward. It would be a turning point in seeing things go from good to not-so-good. So you should understand why things like this get my attention:
CHATHAM, Massachusetts (Reuters) - U.S. inflation expectations have "come a little bit unhinged" and if they rise, cutting U.S. inflation could be difficult and costly, Federal Reserve Board Governor Donald Kohn said on Friday [June 16].
"Inflation expectations have come a little bit unhinged -- it's not a lot, it's not a big deal, but it has presented us with some issues," Kohn, the nominee to be vice chairman at the central bank, said during a panel discussion at a Boston Fed conference on global imbalances.
The phrase "a little bit unhinged" sounds like an oxymoron, sort of like being a little bit pregnant. Either you are or you're not. If you want to take a stand that inflation expectations are on their way up and that it is a "big deal", then you have to be willing to put it in the post-meeting announcement. (I'd refrain from using words like "unhinged" or "big deal" in the announcement, of course.) That would be a clear indication that 50 b.p. is on the table.
Until then, "data dependent" and "measured pace" are all the same to me.
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