Suitably Flip

Federal Reserve Language Watch

The Federal Reserve released its latest interest rate decision today and for the 7th time in a row, it left the Fed Funds rate unchanged at 5.25%.  Also continuing a recent trend, the Fed barely touched the accompanying policy statement (edits from the March 21st statement illustrated below).

The standing pat was widely expected, but a number of Fed watchers were hoping to see hints as to the prospects and timing of any rates cuts the committee may be eyeing.

As for incremental hints, they just don't appear to be here, even shrouded in tea leaves as they tend to be.  But nor does the statement suggest an ease is any further off than was suggested last month.  This failure to budge their winks and implications even a little is sure to fluster the markets, which do love to read great truths into Fed policy statements.  Not surprisingly, the immediate reaction to the release was for the major indices simply to whipsaw spastically.

My take: an ease is still more likely than a hike, as the slowing economic growth appears to be becoming a larger relative concern versus inflation.  Inflation is still a tad elevated, but not overly problematic and trending the right way.  While inflation is generally a thornier problem and it therefore makes sense for Bernanke to err hawkish, timing the policy inflection points is about anticipating the very delayed impact of previous rate changes, not waiting until they're manifest.  Knowing that Bernanke knows this, and given that the slowing economic growth suggests the downward inflation trend is likely to continue, bringing inflation shortly into the comfort zone, my guess is that Bernanke is actually getting ready to ease rates within the next couple meetings, but wants to make sure not to broadcast that through the meticulously scrutinized turns of phrase in the policy statements.

That's the optimistic end of my take.  The pessimistic side of that coin is that with each quarter of decelerating growth without a rate cut, the Fed gets closer to a true hawkish error - keeping rates too high too long in order to fight inflation, perhaps sufficient to snuff out some of the lastingly robust economic fundamentals we've been enjoying.  But so long as the first part of my thesis is correct, Bernanke will pull the rate cut trigger before we find out.

Release Date: March 21May 9, 2007

For immediate release

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

Recent indicators have been mixedEconomic growth slowed in the first part of this year and the adjustment in the housing sector is ongoing. Nevertheless, the economy seems likely to continue to expand at a moderate pace over coming quarters.

Recent readings on coreCore inflation have been remains somewhat elevated. Although inflation pressures seem likely to moderate over time, the high level of resource utilization has the potential to sustain those pressures.

In these circumstances, the Committee's predominant policy concern remains the risk that inflation will fail to moderate as expected. Future policy adjustments 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: 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; Cathy E. Minehan; Frederic S. Mishkin; Michael H. Moskow; William Poole; and Kevin M. Warsh.

Federal Reserve Language Watch - March 21
Tracking Fed Changes - December 12

Comments

Federal Reserve Language Watch

The Federal Reserve released its latest interest rate decision today and for the 7th time in a row, it left the Fed Funds rate unchanged at 5.25%.  Also continuing a recent trend, the Fed barely touched the accompanying policy statement (edits from the March 21st statement illustrated below).

The standing pat was widely expected, but a number of Fed watchers were hoping to see hints as to the prospects and timing of any rates cuts the committee may be eyeing.

As for incremental hints, they just don't appear to be here, even shrouded in tea leaves as they tend to be.  But nor does the statement suggest an ease is any further off than was suggested last month.  This failure to budge their winks and implications even a little is sure to fluster the markets, which do love to read great truths into Fed policy statements.  Not surprisingly, the immediate reaction to the release was for the major indices simply to whipsaw spastically.

My take: an ease is still more likely than a hike, as the slowing economic growth appears to be becoming a larger relative concern versus inflation.  Inflation is still a tad elevated, but not overly problematic and trending the right way.  While inflation is generally a thornier problem and it therefore makes sense for Bernanke to err hawkish, timing the policy inflection points is about anticipating the very delayed impact of previous rate changes, not waiting until they're manifest.  Knowing that Bernanke knows this, and given that the slowing economic growth suggests the downward inflation trend is likely to continue, bringing inflation shortly into the comfort zone, my guess is that Bernanke is actually getting ready to ease rates within the next couple meetings, but wants to make sure not to broadcast that through the meticulously scrutinized turns of phrase in the policy statements.

That's the optimistic end of my take.  The pessimistic side of that coin is that with each quarter of decelerating growth without a rate cut, the Fed gets closer to a true hawkish error - keeping rates too high too long in order to fight inflation, perhaps sufficient to snuff out some of the lastingly robust economic fundamentals we've been enjoying.  But so long as the first part of my thesis is correct, Bernanke will pull the rate cut trigger before we find out.

Release Date: March 21May 9, 2007

For immediate release

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

Recent indicators have been mixedEconomic growth slowed in the first part of this year and the adjustment in the housing sector is ongoing. Nevertheless, the economy seems likely to continue to expand at a moderate pace over coming quarters.

Recent readings on coreCore inflation have been remains somewhat elevated. Although inflation pressures seem likely to moderate over time, the high level of resource utilization has the potential to sustain those pressures.

In these circumstances, the Committee's predominant policy concern remains the risk that inflation will fail to moderate as expected. Future policy adjustments 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: 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; Cathy E. Minehan; Frederic S. Mishkin; Michael H. Moskow; William Poole; and Kevin M. Warsh.

Federal Reserve Language Watch - March 21
Tracking Fed Changes - December 12