Federal Reserve Language Watch

After wandering aimlessly through most of the session, the market suddenly took off this afternoon, following the Federal Reserve's release of its March FOMC statement.

Once again, they left the Fed Funds target rate unchanged at 5.25% in a unanimous decision.

Reading into the various twists and tweaks in language, as compared with the previous statement released on January 31st, Uncle Ben and the Gang appear to be making two central points:  1) We haven't yet shifted from "soft landing" mode back to acccelerating economic growth mode yet, but we still foresee economic growth, despite the housing market's failure to stabilize as quickly as we thought it would.  2) Inflation is a slightly more pressing concern to us than it was two months ago, so don't think we'll hesitate to throw a rate hike at you if inflation doesn't start approaching our comfort zone sometime soon.

I read these both as incrementally hawkish sentiments.  They appear notably more inclined to hike away lingering inflation than to juice the economy with a cut, should growth fail to accelerate through the next couple quarters.  Before the statement, the markets were pricing in a presumptive hold though mid-year, but with a 24% chance of a cut.  Taken at face value, the statement seems to suggest roughly the opposite, with the default position still being to hold, but erring toward hiking should things go askew.

Still, the markets took off almost immediately, with the Dow putting up a triple digit gain and the Nasdaq and the S&P 500 gaining nearly 2% at the close.  It may simply be that investors were cheered by the Fed's assessment that the economy indeed remains poised for steady (if not yet accelerating) growth, particularly after Alan Greenspan threw a bit of cold water on that notion a few weeks back (well, more accurately, after the AP reported with gross and blatant inaccuracy what Greenspan said and manufactured a little cold water-throwing on his behalf).

Either way, Wall Street on balance liked what the Bernanke Fed had to say today.  Below is the "Track Changes" view of today's statement compared to January's.  (Click image for larger view.)