Suitably Flip

Tracking Fed Changes

This afternoon, the Federal Reserve's Federal Open Market Committee issued a new policy statement, indicating it would keep the Fed Funds rate unchanged at 5.25% for the 4th consecutive time.

As always, the market likes to seize on any minor language tweaks within such statements to try to glean any hints about which way the FOMC may be leaning for future moves.  For easy comparison, below is a copy of today's statement as it would look if the Fed had simply opened the October 25th statement in Microsoft Word and turned "Track Changes" on while editing.

Release Date: October 25,December 12, 2006

For immediate release

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

Economic growth has slowed over the course of the year, partly reflecting a substantial cooling of the housing market. Going forward, Although recent indicators have been mixed, the economy seems likely to expand at a moderate pace, on balance over coming quarters.

Readings on core inflation have been elevated, and the high level of resource utilization has the potential to sustain inflation pressures. However, inflation pressures seem 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 judges that some inflation risks remain. The extent and timing of any additional firming that may be needed to address these risks 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; Susan S. Bies; Donald L. Kohn; Randall S. Kroszner; Frederic S. Mishkin; Sandra Pianalto; William Poole; Kevin M. Warsh; and Janet L. Yellen. Voting against was Jeffrey M. Lacker, who preferred an increase of 25 basis points in the federal funds rate target at this meeting.

So the language appears just a wee bit stronger in its reaffirmation of the economic outlook, in that the forecast of moderate expansion is not disturbed by the recent pullback in the GDP growth rate, which, as they note, is due in part to substantial cooling in the housing market.

One would expect whatever incremental economic bullishness this conveys would translate into similar incremental interest rate hawkishness (which the equity markets might not love).  The fact that the Fed is continuing to concentrate on containing inflation, rather than forestalling recession should thin out the ranks of economists and traders looking for a lowering of rates in early 2007.  On the bright side, the analysis lends credence to the argument that we're in for a soft economic landing, which could allow us to skate through the business cycle trough recession-free.

On balance, a rather cruddy session on Wall Street turned somewhat brighter following the release.

Comments

Tracking Fed Changes

This afternoon, the Federal Reserve's Federal Open Market Committee issued a new policy statement, indicating it would keep the Fed Funds rate unchanged at 5.25% for the 4th consecutive time.

As always, the market likes to seize on any minor language tweaks within such statements to try to glean any hints about which way the FOMC may be leaning for future moves.  For easy comparison, below is a copy of today's statement as it would look if the Fed had simply opened the October 25th statement in Microsoft Word and turned "Track Changes" on while editing.

Release Date: October 25,December 12, 2006

For immediate release

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

Economic growth has slowed over the course of the year, partly reflecting a substantial cooling of the housing market. Going forward, Although recent indicators have been mixed, the economy seems likely to expand at a moderate pace, on balance over coming quarters.

Readings on core inflation have been elevated, and the high level of resource utilization has the potential to sustain inflation pressures. However, inflation pressures seem 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 judges that some inflation risks remain. The extent and timing of any additional firming that may be needed to address these risks 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; Susan S. Bies; Donald L. Kohn; Randall S. Kroszner; Frederic S. Mishkin; Sandra Pianalto; William Poole; Kevin M. Warsh; and Janet L. Yellen. Voting against was Jeffrey M. Lacker, who preferred an increase of 25 basis points in the federal funds rate target at this meeting.

So the language appears just a wee bit stronger in its reaffirmation of the economic outlook, in that the forecast of moderate expansion is not disturbed by the recent pullback in the GDP growth rate, which, as they note, is due in part to substantial cooling in the housing market.

One would expect whatever incremental economic bullishness this conveys would translate into similar incremental interest rate hawkishness (which the equity markets might not love).  The fact that the Fed is continuing to concentrate on containing inflation, rather than forestalling recession should thin out the ranks of economists and traders looking for a lowering of rates in early 2007.  On the bright side, the analysis lends credence to the argument that we're in for a soft economic landing, which could allow us to skate through the business cycle trough recession-free.

On balance, a rather cruddy session on Wall Street turned somewhat brighter following the release.