Bernanke's Peaceful, Easy Feeling

In the freshly released minutes of the Federal Reserve's October 24-25 Federal Open Market Committee meeting, we get a little more insight into the the mind of the Temple.

At the meeting, the Fed decided to leave rates unchanged, the primary driver of which is typically the committee's inflation expectations.

The Committee's [September] statement indicated that the moderation in economic growth had appeared to be continuing, partly reflecting a cooling of the housing market. Readings on core inflation had been elevated, and the high levels of resource utilization and of the prices of energy and other commodities had the potential to sustain inflation pressures. However, inflation pressures seemed likely to moderate over time, reflecting reduced impetus from energy prices, contained inflation expectations, and the cumulative effects of monetary policy actions and other factors restraining aggregate demand. Nonetheless, the Committee judged that some inflation risks remained. The extent and timing of any additional firming that may be needed to address these risks would depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information.

This, like much of the language in the minutes, suggests that if anything, the Fed is leaning a little more dovishly than they were a month earlier.  Unemployment has fallen from 4.6% to a ridiculous 4.4% since the meeting, which could give them pause about whether the economy could start to cook too hot.

In general though, the tone was sanguine, with housing being the primary economic trouble spot identified as threatening to tamp down economic growth in coming quarters.  Even so, the construction sector still added jobs in September, with non-residential building more than offsetting the fall-off in residential  building.

Despite the housing slump, the macro forecast offered for 2007-08 was a fairly rosy one.

The staff forecast prepared for this meeting indicated that growth of real GDP had slowed further in the third quarter, reflecting both a significant drag from the continuing contraction in residential construction and a steep decline in motor vehicle assemblies. Looking ahead, a gradual reduction in the restraining effects of the contraction in residential investment and further solid gains in consumer and business spending were expected to lead to a pickup in GDP growth through 2007 and into 2008. These gains in spending were likely to be supported by past declines in energy prices and continued gains in payroll employment and labor income.

Getting an optimistic outlook from the Fed amd a relateively dovish policy outlook (save for dissenting Mr. Lacker) is a rare and beautiful combo.  They made it clear that containing inflation remains their number one concern, but they also made it clear they see signs of inflation (both core and headline) waning.

The Dow is responding to the favorable news (and to yesterday's soft leak of similar sentiments by St. Louis Fed President Willam Poole) with a new all-time intraday high.