FOMC statement

FOMC statement for August 7, 2007:

The Federal Open Market Committee decided today to keep its target for the federal funds rate at 5-1/4 percent.

Economic growth was moderate during the first half of the year. Financial markets have been volatile in recent weeks, credit conditions have become tighter for some households and businesses, and the housing correction is ongoing. Nevertheless, the economy seems likely to continue to expand at a moderate pace over coming quarters, supported by solid growth in employment and incomes and a robust global economy.

Readings on core inflation have improved modestly in recent months. However, a sustained moderation in inflation pressures has yet to be convincingly demonstrated. Moreover, the high level of resource utilization has the potential to sustain those pressures.

Although the downside risks to growth have increased somewhat, the Committee's predominant policy concern remains the risk that inflation will fail to moderate as expected. Future policy adjustments will depend on 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; Frederic S. Mishkin; Michael H. Moskow; William Poole; Eric Rosengren; and Kevin M. Warsh.

The paragraph on inflation is unchanged. In the live coverage on CNBC after the announcement, this part had Jim Cramer a little riled up. Perhaps someone will have that on YouTube. (Aside: Someone made a comment to Cramer during the coverage about his YouTube fame. Priceless.) In keeping with the Chairman's statements a couple weeks ago, I'm really not surprised about this. After all, last months inflation figures just barely took 12 month core inflation into the comfort zone. It is understandable that they would not declare victory yet.

The real meat of the statement is in the additional wording in the other paragraphs. They say, "Financial markets have been volatile in recent weeks, credit conditions have become tighter for some households and businesses,..." As many suggested they should, the Fed acknowledged the fact that there is a bit of a liquidity squeeze. This is significant. I don't recall anything quite this forthcoming in past statement. The closest thing in recent memory are the minutes to the August 18, 1998 meeting which included statements about increased volatility and widening risk spreads.

Finally, they say:

Although the downside risks to growth have increased somewhat, the Committee's predominant policy concern remains the risk that inflation will fail to moderate as expected.

You'd still have to call it an asymmetric bias, but it does reflect a little bit of a changing sentiment. The downside risks should not increase appreciably further unless the unwinding of the mortgage market affects credit conditions more broadly. After all, they mentioned the "solid growth in employment and incomes and a robust global economy" in the first part of the statement. But the bottom line remains that the Fed is going to not jump to rescue the mortgage banks unless they would risk a systemic failure of the system through their inaction. It is not the Fed's job to be an enabler.

UPDATE: For a while the Dow was down, now it's up close to 100 points. As usual, the Wall Street Journal's coverage is excellent with an article, a comment on the Real Time Economics blog about how past statements have reflected new risks, and of course the "Economists React" page, which is as colorful as ever and mostly on target.

The Real Time blog references the 1998 situation as I did above. However, they were looking at the statements, which had a much different character then. I looked at the minutes which provide more detail, and at that time, the August minutes and the September statement would have come out roughly simultaneously. The minutes to todays meeting should prove just as interesting.