The Fed Leaves 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. They have dropped the word "gradual" from their description of the cooling of the housing market.

2. They see energy prices as moderating. The statement no longer mentions energy prices as a potential cause of slower growth, but energy prices are mentioned as a reason to expect inflation to moderate.

3. Just like last meeting, the vote wasn't unanimous - Jeffrey Lacker dissented.

4. The Committee notes, as it did last meeting, that inflation risks remain and further rate moves will depend upon how these risks play out. It does not mention risks to economic growth explicitly as it does with inflation, but housing is mentioned as a growth moderating factor.

Here's the current Press Release along with the previous statement for comparison. The highlighting has been added to emphasize the differences in the two statements:

Press Release for September 20	Press Release for August 8
The Federal Open Market Committee decided today to keep its target for the federal funds rate at 5-1/4 percent.	Identical
The moderation in economic growth appears to be continuing, partly reflecting a cooling of the housing market.	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.
Readings on core inflation have been elevated, 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 reduced impetus from energy prices, contained inflation expectations, and the cumulative effects of monetary policy actions and other factors restraining aggregate demand.	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.	Identical
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; Frederic S. Mishkin; 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.	Identical except that Mishkin was not yet a member of the Board and did not vote.

Comments

[calmo]

Which way was the dissenter, Lacker, dissenting and why?

[Mark Thoma]

He wanted to raise by 25 bps - sees inflation risks as paramount...

[John Konop]

calmo,

Home defaults are getting out of control. If you look at the prime rate it is about a 4% increase on homes due for readjustments via interest only deals north of three years. This is a tough game that does not look good.

[calmo]

thanks, my estimate of Lacker just dropped. As a percentage of total loans, John, and not historical (mo/mo or yr/yr) patterns, the Fed does not claim this is "getting out of control". [ie "defaults up 147% in Denver" has a certain stampede quality about it that "defaults/loan up marginally in Denver" misses.] OTOH the Fed (no stampeders) deliberately understates its concerns about the housing market which, as nearly everyone agrees, is deteriorating.

[Movie Guy]

Mark,

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

[John Konop]

calmo,

This is just the first wave coming in now of the big readjustments on the interest only loans.BTW it is not just Denver. Read this,

Foreclosure.com's data shows Georgia had 7,176 foreclosed properties and 2,478 new foreclosures in August, putting it in first place for the fourth time in the past five months. The state was in second place in July, with 2,665 new foreclosures for a total of 7,244 foreclosed properties.

RealtyTrac's data shows Georgia had 5,967 foreclosed properties, up 26.8 percent over July and up 88 percent over August 2005.

http://www.bizjournals.com/atlanta/stories/2006/09/11/daily18.html

I wonder if getting out of the homes,cars... which people cannot afford, will help consumer spending in the long term ? About a third of consumers have to be getting tight on what they can spend now. That would be an interesting study.

[nedlink]

I rather like Soros' comment that optimists on the economy are like a man who has jumped from the top of the Empire State Bldg. and, half way down, says "so far so good."

[run75441]

Michigan is atad higher in foreclosures given the state of the automotive industry.

"The Detroit News reports that the number of homes uder foreclosure in Michigan doubled from 2004 to 2006 to a rate that is 2 1/2 times the national average. According to foreclosure.com, Michigan had 8,240 homes in active foreclosure on Monday, 8.6% of that nationwide total of 96,019. Our population is only 3.4% of the national average."

[MG]

Mark,

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