Fed Watch: Unsatisfying

Tim Duy is unhappy with today's statement from the FOMC concerning their decision to leave the target interest rate unchanged:

Unsatisfying, by Tim Duy: Like almost everyone, I was expecting policy to remain essentially unchanged at the conclusion of today’s FOMC meeting. Still, I was left unsatisfied by the accompanying statement, posted by Mark Thoma. At best, its brevity makes it look straightforward. At worst, it looks like something cobbled together because FOMC members were unable to reach a uniform opinion on the state of the economy.

First, note the single sentence paragraph describing the state of the economy. In August, the FOMC concluded that “growth has moderated.” That was a definitive conclusion about the state of activity. Now the “moderation appears to be continuing. [emphasis added]” Not so definitive, and suggests that not everyone on the FOMC believes that the second quarter slowdown will intensify or even continue – despite the growing housing slowdown, which they acknowledge by dropping the “gradual” modifier. Moreover, they only mention the housing slowdown in explaining why the economy “appears” to be moderating. If that was the only factor they are looking at, wouldn’t you expect a more definitive forecast? As Jim Hamilton reminds us, you can’t exactly miss the relationship between housing and recessions. If housing is your focus, cut rates now! They didn’t cut rates, so there must be more. So where is the rest of their analysis? What are the factors that offset the housing slowdown? Inquiring minds want to know.

OK, so they don’t completely know which way the economy is headed; not entirely unexpected, given that the US economy is almost certainly at an inflection point (although I like to see a bit more confidence from my central bankers, or at least another explanatory sentence). But I would expect the Fed to have a better handle on the inflation situation. Unfortunately, the third paragraph doesn’t leave me very confident on that front either. In the first sentence, energy prices have the “potential to sustain inflation pressures.” In the second sentence, inflation pressures are likely to moderate due to the “reduced impetus from energy prices.” What? WHAT!?! Are energy prices contributing to inflation or not? Shouldn’t the FOMC have an opinion on the impact of energy prices on inflation?

I think the FOMC is trying to say that high energy prices are worrisome, but with oil prices down, or at least stabilizing, the amount of pass through should be easing. That is the generous interpretation, and they could have said it a bit more directly. But it could be that some members do not believe that stabilizing energy prices will have a moderating impact on inflation – Richmond Fed President Jeffrey Lacker is holding firm to his conviction that rates need to be even higher. Presumably, he doesn’t agree with the FOMC statement. I doubt he is alone. In any event, this mixed message stuff is not exactly credibility enhancing.

Interestingly, the early comments from economists at the Wall Street Journal website do not mention the mixed message on energy. I understand that it is in vogue to cut the Fed slack over their communication “strategy,” but I would prefer that someone was willing to hold the Board’s feet over the fire.

Bottom line: The Fed remains on hold, on average more worried about inflation and less worried about growth than market participants. I believe the statement is muddled and reflects a lack of consensus; more to the point, this statement is simply a minor league effort. The more I read it, the more irritated I get.

Am I just irritable and over-reacting? Maybe I should just be happy that rates were held steady.

Update: William Polley and New Economist have more on the information value of the FOMC statement.

Comments

[John Konop]

If you lower the rates by .25 and the average readjustment is 4% how would that help the housing market?

I think we have the deer in the head lights FED strategy.

[calmo]

No doubt about it: Tim, with his history of following the Fed, is major league.
The FOMC compostion would benefit if they just handed it to Tim, or any single person [Ok maybe not Fisher] rather than getting this democratic consensus under Bernanke. Isn't this the problem: the authoritarian Greenspan led FOMC statements had none of this committee feel about them and Bernanke's gang is not so well-behaved?

[run75441]

Excuse me! Why would the Fed say anything when CPI says energy prices have little or no impact on inflation. Contradictions I think!

says...

Perhaps the Fed has heard rumors that oil prices are falling to help Republicans this November and will reverse course soon after.

Let's see, Goldman removes unleaded from its passive commodity index last month and one has to wonder if Paulson was involved.

[infocompatrol]

There are many versions of CPI, as I am sure most of you are aware. I feel it is important to know what the closes approximation of the figure, which the Fed uses to help make it's decisions. The real meat of the argument is whether or not they are using the "right" measure of inflation.

Not to disrepect Professor Duy, or any other economist/Fed watcher, but I highly doubt any pretense that "just anyone" could do a better job, considering employment figures.

The implication that Republicans manipulate oil prices also takes away from the discussion. Conspiracy theories and rumors in no way resemble an intellectual discussion. If there is any real concern about oil prices and the economic outlook for the entire industrialized world, we must all pay attention to what is happening in the Middle East, not political partisanship and scheming corporate honchos. Step out of the Fed's little bubble and consider what Iran's pursuit of nuclear arms could do for stability in the region that produces most of the world's oil. Is there any who really takes this threat seriously? You bet.

[Movie Guy]

Mark Thoma,

Do you agree or disagree with Jeff Lacker's concerns?

You say that your primary interest is in macro economic theory (and I assume application). This one should be up your alley.

What is your opinion?

[Mark Thoma]

I said before the last meeting that I thought a pause was needed - and I agree with continuing it. I believe the response to inflation should be more than one-to-one as theory suggests (i.e. an expected increase in inflation of 1% requires a more than 1% increase in the federal funds rate), but I think the weakness in the economy along with moderating energy prices will reduce inflation without further tightening. But if inflation (particularly expectations of inflation) doesn't behave as expected, then further tightening may come into play.

[Movie Guy]

Appreciate the response.

With the decline in fuel costs (at least some) and potential continuing economic weakness, isnt' it likely that the fed rates' increases may be over for quite a while?

[Mark Thoma]

Likely, but I'm not yet ready to say certain.

[anne]

Notice the striking decline in long term interest rates. We have an inverted yield curve that is markedly telling us inflation is no problem and the economy is slowing. I can find no more marked and extended inverted yield curve than we now have.

[anne]

The long term Treasury is at a remarkable 4.61%. Whatever does this mean, no inflation, recession? China and Japan sure as heck are not the answer, by the way.