Fed Hits the Pause Button Again
As Wall Street had expected, the Federal Reserve left short-term interest rates unchanged this afternoon, keeping alive its yearlong pause. Chairman Ben Bernanke and the rest of the Fed's open market policy committee voted unanimously to keep the federal funds rate–the interest that banks charge one another–at 5.25 percent.
Now, these Fed statements all tend to read somewhat alike, so analysts look hard for any changes to ferret out what the real mood of the Fed is or how it might be changing. One big change in wording was about inflation. At its previous meeting, the committee said this: "Core inflation 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."
But at today's meeting, the committee said this, instead: "Readings on core inflation have improved modestly in recent months. However, a sustained moderation in inflation pressures has yet to be convincingly demonstrated." This change acknowledges that while there has been some good news of late on inflation, the economy is not out of the woods yet.
The other major alteration was about economic growth. The previous statement said the following: "Economic growth slowed in the first part of this year, and the adjustment in the housing sector is ongoing. Nevertheless, the economy seems likely to expand at a moderate pace over coming quarters."
This statement changed the wording to this: "Economic growth appears to have been moderate during the first half of this year, despite the ongoing adjustment in the housing sector. The economy seems likely to continue to expand at a moderate pace over coming quarters."
So what do these changes mean? Here is what a few top Wall Street economists think:
Michael Darda, MKM Partners: "As we expected, the Fed changed the language in the statement to account for the recent slowdown in core inflation and the pickup in growth from a weak first quarter, leaving the Fed's forecast for modest full-year growth intact. However, even with recent moderation in core inflation, the Fed is not yet convinced that this trend will persist. Neither are we. With the labor market tight and financial conditions still loose, we don't think the Fed's inflation concerns will be put to rest anytime soon.
Moreover, with excess liquidity still evident, we believe core inflation will reaccelerate during the second half, leading to rate hikes in 2008. If such an eventuality is forthcoming, bond yields probably will be headed higher, but we still think stocks can continue to advance due to a favorable valuation, growth, sentiment, and earnings backdrop."
Robert Brusca, Fact and Opinion Economics: "The Fed did change the reference to growth to up its assessment of how strong the economy has been so far this year. The Fed also scrambled its rhetoric on inflation. It found a way to take the statement off the table that said inflation is 'somewhat elevated' but at the same time let us know that the improvement is not enough. The new language is that 'sustained moderation ... has yet to be convincingly demonstrated.' It's hard to argue with any of these changes. We are still data dependent."
John Ryding, Bear Stearns: "This statement should leave the bond market with the impression that the Fed intends to be on hold for some time to come. Our view is that both growth and inflation pressures will likely run ahead of the Fed's forecast in the second half of the year and at some point the next move in policy will be to raise rates to 5 ½ percent, although we do not expect that move to occur until late in the year."
advertisement
