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May 9, 2007

FOMC statement...status quo... for now

Today's statement is slightly more terse with only very minor changes from the last one. Want to parse the words? Be my guest. Here's the statement with old language struck through and new language in bold.

The Federal Open Market Committee decided today to keep its target for the federal funds rate at 5-1/4 percent.
Economic growth slowed in the first part of this year Recent indicators have been mixed and the adjustment in the housing sector is ongoing. Nevertheless, the economy seems likely to continue to expand at a moderate pace over coming quarters.
Core inflation remains somewhat elevated. Recent readings on core inflation have been somewhat elevated. Although inflation pressures seem likely to moderate over time, the high level of resource utilization has the potential to sustain those pressures.
In these circumstances, the Committee's predominant policy concern remains the risk that inflation will fail to moderate as expected. Future policy adjustments will depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information.
Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Thomas M. Hoenig; Donald L. Kohn; Randall S. Kroszner; Cathy E. Minehan; Frederic S. Mishkin; Michael H. Moskow; William Poole; and Kevin M. Warsh.

The statement on the web has a typo in which "Voting for the FOMC monetary policy action were:" is repeated--a classic cut-and-paste typo. Ooops. [UPDATE: This has been fixed.]

Anyway, the only changes in this statement are of the sort that acknowledge recent data. The first change is a direct reference to the slow growth in the 1st quarter. That acknowledgment requires deleting the words "continue to" in the next sentence. Since growth has slowed, it cannot continue at a moderate pace.

In the next paragraph, they take out the mention of "recent readings" on core inflation to reflect the fact that we have seen a couple of encouraging data points, but even so it is not enough to knock the hawk off of its perch. Most notable though is the fact that they retained the language that singles out inflation as the predominant policy concern. Of course it will not surprise you to hear me say that I'm not surprised. Why?

Here's the bottom line. A shift in the stance of the press release would be interpreted as tantamount to an admission that a rate cut is coming at the next meeting. I say this based on how I have seen the markets react in recent months. A shift in the language would cause such a realignment of the financial markets (some of it justified, some of it bound to be overreaction) that they won't do it until they absolutely have to. It's not optimal, but I don't see how it can be avoided now. Look at 2000-2001. Before the unscheduled policy action in January 2001, there was one warning in December. The November statement warned of inflation risks. Read it for yourself if your memory is fuzzy.

Inflation is still the main concern, but it is more of a known quantity. The problem is less a fear that inflation will spike (though that is not ruled out) but that it will remain above where a lot of people want it to be. The spending (i.e. demand) side of the equation is more of an unknown. As long as that remains the case don't expect anything to change. At the very least, we'll probably have to wait through a couple of revisions of 1st quarter GDP and a couple more inflation data points. Stay tuned. If something changes for the worse, there will probably not be a lot of warning. On the flip side, if you're waiting for an "all clear" you have a long, nerve-wracking wait ahead of you.

Posted by William Polley at May 9, 2007 1:35 PM

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