Fed Statement, Revised For Reality

The Fed's statement was as close to sarcasm as you might ever expect to hear from that august body. Here's the full statement:

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 mixed 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 core inflation have been 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.

Of course, they can't say what they really think. The Fed knows how important confidence is, and they do not want to do anything to discourage consumer sentiment or spook the psychology of the markets.

If they were unconcerned with those issues, the statement might look more like this:

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 much worse than what we were hoping for: Housing is a bigger mess than we anticipated; Business Capex is heading south, as are durable goods. Retail sales have been punk for 3 months running, (and what' with those excuses from the retailers? Too hot! Too cold! Lunar eclipse!) Don't even ask about the Automakers. We expect the economy is likely to continue to soften until it slips to about a 1.5% GDP.

Even worse, recent readings on inflation have been elevated. We were hoping that inflation pressures would moderate as the economy stabilized, but no such luck.

In these circumstances, the Committee's predominant policy concern is that we have painted ourselves into a corner, and we are running out of options. On the one hand, Inflation remains an ongoing concern, as medical costs, food, and energy remain problematic. On the other hand, it is apparent that growth is cooling rapidly. Housing has flipped from a net positive for consumers and job seekers to a net negative.

All told, we are running out of options until one or the other of these gets much much worse. Future policy adjustments, therefore, will depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information. As noted above, if GDP slips below 1.5%, we will be shifting our bias towards easing. Appreciably worse that 1.5%, and we will have to act on rates to prevent a recession -- inflation be damned.

On a final note, the FOMC has taken up a collection, and as a retirement present, we are sending former Chairman Alan Greenspan to a lovely spa on Fiji Island for the foreseeable future. Since there are no satellite feeds, internet connections or any off island communications at all, the Chairman can thank us when he returns -- preferably, around December 2008.

Don't hold your breath waiting for that dose of reality . . .

Comments

[akindman:]

Confirmation bias

2007 Mar 21 04:50 PM

[David Jackson:]

Barry, you're in good company. You wrote:
<blockquote>...w... have painted ourselves into a corner, and we are running out of options. On the one hand, Inflation remains an ongoing concern, as medical costs, food, and energy remain problematic. On the other hand, it is apparent that growth is cooling rapidly.</blockquot...

Look at what John Hussman wrote last Monday:
<blockquote>...T... latest inflation figures were fairly hostile to any hope for a near-term rate cut. Meanwhile, overall U.S. capacity utilization has pushed up to 82% - a level at which the Fed has historically been much more inclined to raise rates than lower them. To call this a “Goldilocks” environment where inflation and economic risks are balanced is like the proverbial image of the guy with his head in the freezer and his feet in the oven, saying the temperature is just right. Inflation and economic risks are balanced because both are unfavorable.</block...

The question is why the market reacted so positively to the Fed's decision.

2007 Mar 22 03:15 AM