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June 25, 2008
FOMC holds steady as expected
You didn't really think they'd raise rates at this meeting, did you? Here's the full statement:
The Federal Open Market Committee decided today to keep its target for the federal funds rate at 2 percent.
Recent information indicates that overall economic activity continues to expand, partly reflecting some firming in household spending. However, labor markets have softened further and financial markets remain under considerable stress. Tight credit conditions, the ongoing housing contraction, and the rise in energy prices are likely to weigh on economic growth over the next few quarters.
The Committee expects inflation to moderate later this year and next year. However, in light of the continued increases in the prices of energy and some other commodities and the elevated state of some indicators of inflation expectations, uncertainty about the inflation outlook remains high.
The substantial easing of monetary policy to date, combined with ongoing measures to foster market liquidity, should help to promote moderate growth over time. Although downside risks to growth remain, they appear to have diminished somewhat, and the upside risks to inflation and inflation expectations have increased. The Committee will continue to monitor economic and financial developments and will act as needed to promote sustainable economic growth and price stability.
Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Donald L. Kohn; Randall S. Kroszner; Frederic S. Mishkin; Sandra Pianalto; Charles I. Plosser; Gary H. Stern; and Kevin M. Warsh. Voting against was Richard W. Fisher, who preferred an increase in the target for the federal funds rate at this meeting.
Michael Mandel thinks that the Fed should have cut. I haven't seen too many others jump on that bandwagon. Barry Ritholtz thinks that statement is "too cheery on growth, not concerned enough about inflation -- and is totally irrelevant". Mark Thoma does the side-by-side with the last statement and writes that "There aren't many clues about the future in the statement..."
I don't know about that. I happen to think that this statement paves the way for standing pat for the rest of 2008. They seem to be extending the time horizon for when to expect inflation pressures to moderate ("later this year and next year") and they took out the part about it being necessary to "monitor inflation developments carefully".
So Mandel thinks a cut is in order. One can speculate about what a Greenspan Fed might have done in this situation. I certainly know what Wall Street would like. In the face of that, it seems that Mr. Bernanke might be following the right course. He's waiting for real rates to come up on their own as the economy recovers. I think that's the way to interpret it, and I think this course is less bad than some of the other options.
From the dissenters at the last couple of meetings, it looks like Fisher is trying to stay one step more hawkish than the chairman--now dissenting by voting for a rate hike in the face of the majority holding steady (previously he voted to hold steady when the majority wanted a cut). Plosser's votes (dissenting by voting to hold steady rather than cut in April but voting with the majority to hold steady now) are probably more fundamentally in line with Bernanke's thinking about where they want to be down the road (assuming the inflation forecasts are right), but he looks to have wanted a little bit more of a start at getting the real rate up where it should be.
If inflation shows any progress downward, I think they'll stay here as long as they can. If not, then rates probably go up in 2009. But this statement gives me the impression that they are prepared to give inflation some more time before they pull the trigger.
Posted by William Polley at June 25, 2008 11:39 PM
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