The Fed Takes a Breather: Target Rate Unchanged at 5.25%

The Federal Open Market Committee voted today to keep the target federal funds rate at 5.25%. The key differences from the last Press Release are:

1. Last meeting, indicators suggested a slowdown was beginning. This meeting, the committee saw clear signs that the slowdown is already underway. For example, the statement "Recent indicators suggest that economic growth is moderating" has been changed to "Economic growth has moderated."

2. The statement "Ongoing productivity gains have held down the rise in unit labor costs" in the last statement has been dropped from the current statement reflecting the new productivity numbers.

3. The Committee explicitly mentions "the cumulative effects of monetary policy actions and other factors restraining aggregate demand" in justifying its decision to hold steady for now.

4. The vote wasn't unanimous - Jeffrey  Lacker dissented.

5. For reasons that are not stated, requests to increase the discount rate are not included. Generally this gives information on which bank presidents favored an increase in the target rate (those requesting a discount rate increase), and which do not (those who do not submit a request to increase the discount rate). [Update: Comments note that discount rate requests are not included when rates are held constant. This is because district banks do not need permission to hold the discount rate constant.]

6. The Committee makes it clear that if further rate increases are needed to contain inflation then, with due attention to its output goal, they are willing to tighten further..

Here's the current Press Release along with the previous statement for comparison. The highlighting has been added:

Today's Statement	June 29, 2006 Statement
For immediate release The Federal Open Market Committee decided today to keep its target for the federal funds rate at 5-1/4 percent.	For immediate release The Federal Open Market Committee decided today to raise its target for the federal funds rate by 25 basis points to 5-1/4 percent.
Economic growth has moderated from its quite strong pace earlier this year, partly reflecting a gradual cooling of the housing market and the lagged effects of increases in interest rates and energy prices.	Recent indicators suggest that economic growth is moderating from its quite strong pace earlier this year, partly reflecting a gradual cooling of the housing market and the lagged effects of increases in interest rates and energy prices.
Readings on core inflation have been elevated in recent months, and the high levels of resource utilization and of the prices of energy and other commodities have the potential to sustain inflation pressures. However, inflation pressures seem likely to moderate over time, reflecting contained inflation expectations and the cumulative effects of monetary policy actions and other factors restraining aggregate demand. Nonetheless, the Committee judges that some inflation risks remain. The extent and timing of any additional firming that may be needed to address these risks will depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information.	Readings on core inflation have been elevated in recent months. Ongoing productivity gains have held down the rise in unit labor costs, and inflation expectations remain contained. However, the high levels of resource utilization and of the prices of energy and other commodities have the potential to sustain inflation pressures. Although the moderation in the growth of aggregate demand should help to limit inflation pressures over time, the Committee judges that some inflation risks remain. The extent and timing of any additional firming that may be needed to address these risks will depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information. In any event, the Committee will respond to changes in economic prospects as needed to support the attainment of its objectives.
Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Susan S. Bies; Jack Guynn; Donald L. Kohn; Randall S. Kroszner; Sandra Pianalto; Kevin M. Warsh; and Janet L. Yellen. Voting against was Jeffrey M. Lacker, who preferred an increase of 25 basis points in the federal funds rate target at this meeting.	Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Susan S. Bies; Jack Guynn; Donald L. Kohn; Randall S. Kroszner; Jeffrey M. Lacker; Sandra Pianalto; Kevin M. Warsh; and Janet L. Yellen.
Not included	In a related action, the Board of Governors unanimously approved a 25-basis-point increase in the discount rate to 6-1/4 percent. In taking this action, the Board approved the requests submitted by the Boards of Directors of the Federal Reserve Banks of Boston, New York, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, St. Louis, Minneapolis, and Dallas.

Comments

[dogfacegeorge]

According to Mandel, "The bad news, of course, is the large downward revisions in the productivity growth for 2003, 2004, and 2005."

WTF? What sense does it make to discuss ANY of these numbers if the numbers reported THREE YEARS AGO are subject to "large downward revisions"?

[William Polley]

About the discount rate: Generally they don't mention it if it is unchanged. I cannot recall ever seeing it mentioned if it remained unchanged, even if there might have been some diverging opinion.

You will find it in the next release of the Board of Governors minutes. These come out about every couple months. Requests concerning the discount rate generally come in a few days ahead of the FOMC meeting. They are briefly discussed but no action is taken pending the outcome of the FOMC. Since the NFP data played a role in solidifying the market's sentiment for a pause, I think it is reasonable to expect that a few regional banks submitted requests to increase prior to that. Whether the NFP data would have caused any of them to reverse course is anyone's guess, so I would interpret those requests cautiously.

[No Name]

All numbers are revised.

And what was the vote for the discount rate? Am I missing something?

[No Name]

I can see for some reason it wasnt included, wtf.

That must mean there was more dissent, at least my conspiracy theory goes like that.

[Iris Pang]

In the past when there was a pause, there was no request to change the discount rate. http://www.federalreserve.gov/boarddocs/press/monetary/2004/20040504/default.htm

[No Name]

Still it would have been interesting to see if the regional banks were on board or not.

I guess you wouldnt raise the discount rate when the funds rate stays the same, but still would have been interesting to see if more dissent.

[Mark Thoma]

Yes - thanks. William Polley made the same point.

I should have realized that there is no need to approve keeping the discount the same, only changes require approval. It's been so long since a pause, guess I forgot...

But I'd like to know too.