The Federal Open Market Committee, the Fed's policy arm, met today and left the fed funds rate unchanged at 5.25%. A statement following the meeting used the word "moderate" three times, once as an adjective to describe the expected pace of economic expansion and twice as a verb to predict the trend of inflation. Even more popular was the word "inflation," which appears four times in the brief statement. Even though the most recent inflation statistics have been "somewhat elevated,"--which by the way is classic Fedspeak: Never be direct; always hedge your bets--inflation "seems likely" to taper off. Nevertheless, the risk that it won't is still the Fed's predominant worry. But, for now, they will wait and see, with "future policy adjustments" dependent on incoming inflation data.
The two most important words, though, were those that did not appear in the statement. Saying that "the adjustment in the housing sector is ongoing" is a long way from expressing concern that the problems of many sub-prime mortgage companies will spread to the wider economy. There is, as yet, little evidence of such a spillover and the Fed is right not to refer to it. The other important word is "tightening." In previous post-meeting statements, the Fed has consistently warned that future increases to the fed funds rate may be necessary. This time they did not, an omission the financial markets are taking as an invitation to party. Bond and stock prices are both rising, and fed funds futures are pricing in a fair probability of a rate cut as early as mid-year.
Comments