June 28, 2007
There seems to be some slight disagreement about what information the Federal Open Market Committee meant to convey with today's post-meeting statement. MarketWatch, for example, had no problem covering a lot of territory with its collection of expert opinion:
The statement was "mildly hawkish," said Bill Sullivan, chief economist at JVB Financial. "They don't want investors to get complacent about the inflation outlook even though we've had some good data recently."
The Fed softened its tone about inflation, said Tony Crescenzi, chief bond market strategist for Miller Tabak & Co., who cautioned against overanalyzing the statement, "which continues to paint a picture of monetary policy that is likely to be little changed in the months ahead."
Kevin Logan, senior market economist at Dresdner Kleinwort, disagreed. He said the Fed "haven't backed off at all" on its inflation worry.
The "softened tone" interpretation got a little support at The Wall Street Journal's Real Time Economics blog:
ING economist Rob Carnell said the FOMC, in acknowledging improvement in core inflation, took “a slight step in the direction of a neutral bias to policy...
But most of the votes were lining up in the "hawkish" camp: At FX Daily:
This language is more hawkish than the May statement, where the Fed simply said that “economic growth has slowed.” In terms of inflation, the Fed isn’t convinced that the battle has been won. Instead, they expect inflation to remain a problem.
... at Bloomberg ...
"The Fed is signaling it wants it proven first that inflation is down and will stay down,'' said Gerald Lucas, senior investment strategist in New York at Deutsche Bank AG, one of the 21 primary U.S. government securities dealers that trade with the Fed. "Inflation and the perception that the Fed will remain on hold is what the market is reacting to''...
"The market is pricing in a higher probability, though it's still very small, that the next Fed move is a tightening,'' said Scot Johnson, who manages $2.1 billion of government bonds in Houston at AIM Capital Management Inc. Inflation is still ``not low enough that everybody's happy.'
... and at Forbes.com...
"The statement suggests that the Fed has a ways to go in containing inflation," [Drew Matus, economist at Lehman Brothers] told Forbes.com. "But they acknowledge progress. The Fed is no closer to raising or cutting rates. They will be on hold for some time, and that is what we should continue to expect."
There were, in fact, warnings about reading too much of anything into the changes in the Committee's language. Again from The Wall Street Journal:
... Drew Matus notes that the FOMC removed the word “elevated” from its latest description of inflation. The fact that the year-over-year inflation rate is likely to be unchanged from the readings before the May meeting “suggests that the removal of the word had less to do with a change in the FOMC’s view on the inflation outlook and more to do with removing a word that was garnering unwanted attention.”
The net change in the Fed’s position is “trivial” given the view of moderating growth and the risk that inflation won’t moderate, said Ian Shepherdson, chief U.S. economist at High Frequency Economics.
And elsewhwere at the WSJ's Real Time Economics, there is the suggestion that the language is ambiguous because the Committee is feeling -- uh, ambiguous:
With core inflation at 2% in April and perhaps about to go lower, Thursday’s policy statement by the Fed dropped its reference to inflation as “somewhat elevated.” Some analysts saw this as acknowledgement of an inflation target somewhere around 2%.
More likely, the Fed simply punted on the question...
Dropping the reference to “elevated” without replacing it with anything may have been necessary to satisfy those who don’t buy into the 1% to 2% comfort zone without arousing objections from those who do.
If you are feeling puzzled, you can always look forward to July 19 -- and the release of the meeting minutes.
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