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The Atlanta Fed's macroblog provides commentary and analysis on economic topics including monetary policy, macroeconomic developments, inflation, labor economics, and financial issues.

Authors for macroblog are Dave Altig, John Robertson, and other Atlanta Fed economists and researchers.


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November 22, 2005


The End To Measured Pace?

The minutes of the November 1 meeting of the Federal Open Market Committee are now public record, and they contained this tidbit about the future of the measured pace formulation:

In their ongoing discussion of the Committee's communication strategy, participants expressed a variety of perspectives about how the policy statement issued at the end of FOMC meetings might evolve over time. Several aspects of the statement language would have to be changed before long, particularly those related to the characterization of and outlook for policy. Possible future changes in the sentence on the balance of risks to the Committee's objectives were also discussed. Participants noted that any forward-looking elements of the statement should clearly be conditioned on the outlook for inflation and economic growth. For this meeting, members concurred that the current statement structure could be retained, as it accurately conveyed their near-term economic and policy outlook.

Looking toward a change in language is certainly understandable in light of this (from Bloomberg):

Federal Reserve policy makers discussed the need "before long'' to change their outlook for the benchmark U.S. interest rate, with some worried about the risk of raising it too much, minutes of their Nov. 1 meeting showed.

Some members of the rate-setting Federal Open Market Committee "cautioned that risks of going too far with the tightening process'' may eventually emerge. The report was released today in Washington.         

That prompted this, from Reuters:

"If the Fed is going on hold, it's a big positive," said Mark Bronzo, managing director of Gartmore Separate Accounts LLC.

The Nov. 1 minutes showed that some members of the Federal Open Market Committee "cautioned that risks of going too far with the tightening process could also eventually emerge."

Not so fast though:

After the closing bell, Jeffrey Lacker, the president of the Federal Reserve Bank of Richmond, said it was too soon to declare the U.S. central bank's campaign of interest-rate increases was over. He also said inflation remained a risk amid solid growth, echoing concerns revealed in the Fed's minutes.

"It looks like we're weathering the energy shocks pretty well, but it is too soon to declare us out of the woods," Lacker said.

Nonetheless, the equity markets liked what they read. From MarketWatch:

Stocks closed sharply higher Tuesday, with Dow component Intel Corp. advancing more than 3%, after new Federal Open Market Committee meeting minutes showed some members are worried about excessive rate tightening...

What caught the market's attention is a comment that some FOMC members believe the Fed should be alert to the fact that they may raise rates too aggressively at some point in the future and that this might affect economic growth," said Michael Sheldon, chief market strategist at Spencer Clarke.

"This comment is the first time FOMC members have provided any hint that they may be moving closer to the end of the current rate tightening cycle," he added.

The bond market was pleased too. From CNNMoney:

Treasury bonds turned higher Tuesday as investors eyed the minutes from the last Fed meeting, which revealed that central bankers were still worried about a possible pickup in inflation but were also eyeing a slowdown in their rate-hiking campaign.

The currency watchers, though, had a little different reaction. From DailyFX:

The dollar is rolling over and as always, it is the Fed’s fault. The market was already reeling from the hawkish comments from ECB officials over the past few days and today, the sell-off in the dollar deepened when some Federal Reserve members warned against going too far with rates during their November 1st meeting.

I guess you just can't please everyone.

UPDATE: Stock Trading Update says "The Fed Blinks," and thinks this is why market participants are "wearing their rally hats."  Barry Ritholtz agreesEdward Hugh complains that the Financial Times can't quite get the story straight.

November 22, 2005 in Federal Reserve and Monetary Policy | Permalink

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Listed below are links to blogs that reference The End To Measured Pace? :

» Fed Watch: Changing the Course? from Economist's View
Here's Tim Duy's latest Fed Watch: Nothing like the Fed minutes to liven up the debate! The minutes generated a buzz among bloggers as well as the financial community, with stocks and bonds gaining on news that the Fed may [Read More]

Tracked on Nov 27, 2005 6:54:09 PM

Comments

http://naybob.blogspot.com/2005/11/market-soapbox-112205.html

Dave,

Here's what the talking heads ignored:

"The outlook continued to be for core inflation to pick up modestly over coming quarters owing to the lagged effects of higher energy prices... Manufacturing capacity utilization dropped substantially in September... underlying economic slack was likely quite limited."

In other words, the fed expects core inflation to pick up near term and even though capacity utilization dropped, the underlying slack (i.e. the output gap or difference in what we can produce vs. what we are producing) is quite limited or narrow.

Limited slack means that if there is a further increase in demand, price inflation will ensue. This could trigger more rate increases at higher levels (i.e. 50 basis point, rather than the measured 25 bps) and this would necessitate the removal of the term "measured".

The Nattering Naybob

Posted by: The Nattering Naybob | November 22, 2005 at 10:24 PM

Well, well, well. What are the odds now on a brief pause at the next meeting, and a moore definitive revision of the wording before continuing to tighten.

This all depedns on how you read the tea leaves, but if you think that this was done explicitly to open possibilities later (to increase your options portfolio), ie you need to read this backwards, well.......

Posted by: Edward Hugh | November 23, 2005 at 02:49 AM

Well, I take some comfort in the fact that Bloomberg just picked up a tune I've been playing: you need to prepare the ground for Bernanke. I still expect one pause before 1 February 2006:

"Federal Reserve policy makers, by signaling they will soon alter their outlook for interest rates for the first time in 18 months, may help maximize Ben Bernanke's options on how much further to go in raising rates."

"Bernanke awaits Senate approval to succeed Alan Greenspan as Fed chairman. Bernanke would take office Feb. 1, the day after traders expect the central bank to boost the benchmark rate to 4.5 percent, which would be the 14th consecutive quarter-point increase."

"``The assumption is, they'll have to change it to give Bernanke a clean slate,'' said Diane Swonk, chief economist at Mesirow Financial Inc. in Chicago."

The puase can't be Bernanke's first decision (or his second one), that would give all the wrong signals. That would be a job for the ECB, and the Fed isn't the ECB (I hope).

Basically Bernanke is going to be tested, and it doesn't matter whether inflation is a real problem or not, to establish credibility he has to be seen to be tough. This is what happens when you get into the realm of credibility and expectations.

Posted by: Edward Hugh | November 23, 2005 at 02:59 AM

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