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February 21, 2007
FOMC minutes: The message is clear
Here's the link to the minutes. Scroll about halfway down to get past the formalities of the first meeting of the year. I will focus on this part:
The FOMC's decision at the December meeting to leave its target for the federal funds rate unchanged and to retain the language in the statement regarding the risks to inflation appeared to match investors' expectations. However, the characterization of recent economic growth was reportedly interpreted by market participants as suggesting a slight softening in the Committee's outlook for the expansion. As a result, the expected path of the federal funds rate beyond the near term edged down. The subsequent release of the minutes from the meeting elicited little market reaction. Investors' outlook for economic activity firmed over the intermeeting period, as economic data releases came in stronger than expected and oil prices declined notably. As a result, investors markedly reduced the extent of policy easing anticipated over coming quarters, and yields on nominal and inflation-indexed Treasury coupon securities rose. Measures of inflation compensation were little changed on net. Spreads of investment-grade corporate bond yields over those of comparable-maturity Treasury securities moved down a bit, while those of speculative-grade issues declined significantly more. Broad equity indexes edged higher. The foreign exchange value of the dollar against other major currencies rose, on balance, particularly versus the yen.
I believe we covered this ground back in December when I said,
...would you want to bet any amount of your paycheck that a more balanced assessment of risks would be interpreted correctly by the market?
Anyway, back to the minutes...
All meeting participants expressed some concern about the outlook for inflation. To be sure, incoming data had suggested some improvement in core inflation, and a further gradual decline was seen as the most likely outcome, fostered in part by the continued stability of inflation expectations. However, participants did not yet see a downtrend in core inflation as definitively established. Although lower energy prices, declining core import prices, and a deceleration in owners' equivalent rent were expected to contribute to slower core inflation in coming months, the effects of some of these factors on inflation could well be temporary. The influence of more enduring factors, importantly including pressures in labor and product markets and the behavior of inflation expectations, would primarily determine the extent of more persistent progress. In light of the apparent underlying strength in aggregate demand, risks around the desired path of a further gradual decline in core inflation remained mainly to the upside. Participants emphasized that a failure of inflation to moderate as expected could impair the long-term performance of the economy.
Clear enough for you?
In other news... (Reuters)
WASHINGTON (Reuters) - Higher-than-expected U.S. consumer prices last month chilled hopes that the Federal Reserve will drop a policy bias to hike interest rates and served a terse reminder that inflation remains a threat.
Economists said the rise would not prompt immediate action from the U.S. central bank, which has voiced guarded optimism that price pressures were heading down, but it reduced the likelihood that the Fed will cut rates any time soon.
"It appears that the deceleration in core inflation that was evident in October and November has come to a halt," wrote Morgan Stanley economists David Greenlaw and Ted Wiesman.
...
The Department of Labor said on Wednesday that the Consumer Price Index rose 0.2 percent in January, while the core non-food, non-energy index climbed 0.3 percent.
In both cases, the rise was one-tenth of a percentage point higher than forecast by analysts, lifting the gain in core CPI since January 2006 to 2.7 percent. This is well above the comfort zone voiced by a number of Fed policymakers for core inflation to remain in a range of 1 percent to 2 percent.
The Conference Board's Leading Economic Indicators was up, but by less than expected.
No reason to expect any change in rates at the next meeting, at least not at this time. All signs point to a positive but slightly below average year for growth with inflation not yet fully whipped. Of course, the Fed cannot target the specific reason(s) for growth being below average. If the housing slowdown is one of those reasons, it could be argued that the Fed should keep its hands off the throttle unless there was a danger of systemic risk, which I don't see at the moment. Therefore, it's a pretty good bet that the anti-inflation bias will remain at least for a few more months.
Posted by William Polley at February 21, 2007 2:17 PM
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