Federal Reserve Language Watch

Today, the Fed decided to leave the Fed Funds rate unchanged at 5.25% for the eight consecutive time.  Below are the language changes between the May 9th policy statement and today's.

Release Date: May 9,June 28, 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.

Economic growth slowed in the first part of this year and theappears to have been moderate during the first half of this year, despite the ongoing adjustment in the housing sector is ongoing. Nevertheless, the The economy seems likely to continue to expand at a moderate pace over coming quarters.

Core inflation remains somewhat elevated. AlthoughReadings on core inflation have improved modestly in recent months. However, a sustained moderation in inflation pressures seem likely to moderate over time,has yet to be convincingly demonstrated. Moreover, 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: 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.

The market should like the language adjustments, as they seem to give comfort on both sides of the Fed equation - early 2007 growth gets upgraded from "slowed" to "moderate" (likely a combined effect of the first quarter's anemic growth accounting for a smaller portion of the year-to-date and this morning's slight upward adjustment in the estimate of that quarter's growth).  And - more significantly - the committee actually indulged in an uncharacteristically unequivocal statement about inflationary pressures.  Namely, that they're easing (albeit, not yet in a convincingly sustained way).

A stable outlook for growth AND easing inflation spells happy times for equity markets, as not only can aggregate corporate profits be expected to remain strong, but the Fed has effectively holstered its weapon for the time being.  Maybe it hasn't snapped the holster shut, and maybe its hand is still on the butt of the gun, but it's no longer wielding it quite as menacingly.  Of course the FOMC is quick on the draw and could always hike rates unexpectedly if it gets spooked, but this has to be about as benign a statement as the markets could have asked for.

The immediate aftermath saw a bit of the usual whipsawing in the major indices, but no compelling move higher just yet.  Most market sectors were moderately higher for the session already, following a few frenetic days on Wall Street.

I'll hazard a guess that we move meaningfully higher in the final 90 minutes of trading.

(In the spirit of full disclosure, I own some front month call options on a company reporting earnings after the bell today, so it's in my interest that market sentiment turn bullish.  So please completely disregard everything I've said, insofar as it impacts any investment decision you might be thinking about making.)

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Update:   No such luck.  The markets closed pretty much flat from where they were at 2:30.  Most commentators out there seem to have been less overwhelmed by the adjusted inflation language than I and aren't ready to buy into the idea that the Fed is veering dovish.  Still, given the Bernanke Fed's typical preference for nearly imperceptible wording changes from meeting to meeting, I still see today's substanatially altered statement as plenty whelming.