Pondering The FOMC

The experts seem to be of mixed minds about the real meaning of yesterday's FOMC statement. Most commentators seem to think that we are in for constant funds-rate sailing as far as the eye can see. From the Wall Street Journal Online...

... The bottom line is steady as she goes. It's beginning to feel as if the Fed is never going to change policy in either direction, and the group of economists who are calling for an easing by August are beginning to run short of time. --Stephen Stanley, RBS Greenwich Capital

... This statement is very much in-line with our outlook of a Fed on the sidelines until year-end, as it continues to monitor the evolution of U.S. economic growth and inflation. --Scott Anderson, Wells Fargo Economics

... If the economy continues to grow as the FOMC expects -- slow but not dangerously low growth -- and inflation moderates as they anticipate, then the current stance of monetary policy is likely to still be in place at year-end. --Steven A. Wood, Insight Economics

The same sentiment surfaces at FXStreet.com...

Bottom line is that FOMC’s baseline scenario remains unchanged. The committee still views moderate growth and gradually ebbing inflation as the most likely medium-to-long term outcome. This suggests that FOMC’s current wait-and-see attitude is likely to remain unchallenged for yet some time.

... and from John Berry at Bloomberg:

Unless there's a definitive shift in economic data before Federal Reserve officials meet next month, they might just as well issue the same statement they put out yesterday when they left the interest rate at 5.25 percent...

For officials to begin thinking seriously about reducing the lending rate target, as more than a few analysts are projecting for later this year, there would have to be both a distinct softening of the labor market and some evidence that inflation indeed is moderating.

Others, however, sense a rate cut on the horizon.  Back to the Wall Street Journal...

Bottom line: Until the unemployment rate starts to move or payrolls tank, they're on hold. August, the first ease. --Ian Shepherdson, High Frequency Economics

... and from The New York Times:

“If it were us, we would adopt a more balanced stance,” said Jan Hatzius, chief economist at Goldman Sachs, who has predicted that slow growth will force the Fed to reduce the overnight Fed funds rate to 4.5 percent from 5.25 percent by the end of this year.

But Mr. Hatzius said he had not expected the Fed to give up its precautionary tilt against inflation just yet. “The argument from their side is that they gave themselves a lot of flexibility at the last meeting,” Mr. Hatzius said.

But wait -- yet others are placing their bets on a future of rate hikes.  From the Journal once again:

... the Fed has no rate cut cards hidden up its sleeve. Instead, in order to play catch-up with inflation and prop up the sagging greenback, the Fed will be forced to deal a series of rate hikes. --Peter Schiff, Euro Pacific Capital

... Our forecast is that core inflation will gradually rise and end the year at 2.5% on core PCE price inflation and we think that eventually the Fed will have to adjust rates modestly higher. We see the funds rate at 5.5% by year-end and 5.75% by the middle of 2008. --Bear Stearns U.S. Economics

The Financial Times suggests the Committee itself is of many minds:

... it is not entirely clear how the Fed would respond to moderately softer data. Some committee members, who appear anxious to drive inflation down towards 1.5 per cent in the none-too-distant future, might welcome the added disinflationary impetus.

Others, who could apparently live with inflation a fraction below 2 per cent for at least a lengthy period of time, might prefer to respond to further soft data by taking the opportunity to cut rates to restore growth to trend more quickly.

Well, I guess that settles it.