The FOMC Holds Target Rate at 5.25%

No surprise, the Fed left the target rate at 5.25%. The statement says:

1. Recent readings on output growth have been mixed due to adjustment in the housing sector, but as in the last statement the Committee concludes that "the economy seems likely to continue to expand at a moderate pace over coming quarters."

2. The Fed believes says recent readings on core inflation have been somewhat elevated, but they continue to expect moderation of inflation in the future. However, the statement notes the potential for high levels of resource utilization to "sustain inflation pressures."

3. The balance of risks is still tilted toward inflation. Some analysts read the statement as implying that the Fed is backing off of its inflation bias (the write-up changes from "any additional firming" to "policy adjustments," and the dropping of the word firming is seen as a signal that the Fed has a more balanced risk assessment between inflation and slowing output growth), but I still see the statement as indicating the Fed sees risk of inflation as the predominant concern (see the WSJ and Bloomberg). [Update: William Polley comments on whether the bias has changed. Kash Mansori also weighs in. Bloomberg's John Berry also discusses this. All agree that while the Fed has given itself a bit of wiggle room with the change in wording, inflation is still the main concern.]

4. There was no dissent.

Here are the differences between the last statement and this one:

March 21, 2007 Statement	January 31, 2007 Statement
The Federal Open Market Committee decided today to keep its target for the federal funds rate at 5-1/4 percent.	The Federal Open Market Committee decided today to keep its target for the federal funds rate at 5-1/4 percent.
Recent indicators have been mixed and the adjustment in the housing sector is ongoing. Nevertheless, the economy seems likely to continue to expand at a moderate pace over coming quarters.	Recent indicators have suggested somewhat firmer economic growth, and some tentative signs of stabilization have appeared in the housing market. Overall, the economy seems likely to expand at a moderate pace over coming quarters.
Recent readings on core inflation have been somewhat elevated. Although inflation pressures seem likely to moderate over time, the high level of resource utilization has the potential to sustain those pressures.	Readings on core inflation have improved modestly in recent months, and inflation pressures seem likely to moderate over time. However, the high level of resource utilization has the potential to sustain inflation pressures.
In these circumstances, the Committee's predominant policy concern remains the risk that inflation will fail to moderate as expected. Future policy adjustments will depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information.	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.
Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Susan S. Bies; Thomas M. Hoenig; Donald L. Kohn; Randall S. Kroszner; Cathy E. Minehan; Frederic S. Mishkin; Michael H. Moskow; William Poole; and Kevin M. Warsh.	Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Susan S. Bies; Thomas M. Hoenig; Donald L. Kohn; Randall S. Kroszner; Cathy E. Minehan; Frederic S. Mishkin; Michael H. Moskow; William Poole; and Kevin M. Warsh.

Comments

[Martin]

Mark,

As you'll probably have guessed I am no economist, so I would be grateful for any help the commentors and yourself can provide.

Does a statement that "output growth" has "been mixed due to adjustment in the housing sector" really mean that too much (a fluid, foggy word, I know, but I can't think of anything better) output is now concentrated in housing?

Because if that's the case surely that affects both productivity and wider GDP? If only because the dedication of human (time) and financial resources spent trading houses isn't really producing anything?

Or if it is producing something, then it is a sign of profound economic weakness; in fact a desperate vulnerability to inflation's depredations?

[anne]

No; all the comment means is that a house is a major purchase and housing a major part of the economy and a change in housing activity will effect economic growth. in this case slowing growth somewhat but interestingly not all that much as yet. The Federal Reserve thinks the slowing of housing activity will be moderate enough and compensated enough to avoid a recession, evidently even if short term interest rates are not lowered.

[calmo]

Something so refreshing about that opening Martin...disarmingly open: I can't wait to tell you how under-educated I am about this business. My fall back position is: we (not just me but many others who like to gather here and feel like part of a movement) are keen (not always serious mind you) recreational economists. Like Lily Tomlin, after awhile you learn that you aren't dealin with just anybody off the street here.

There is this guy (ok, real PhD Economist that actually has a work history in the Fed for one of the Reserve Banks), Tim Duy, who is going to post any minute now (obliterating everything here, such is his power) because this is his niche market.
In the meantime suffer me on this:"output growth" has "been mixed due to adjustment in the housing sector" means not all segments of GDP were growing (BEA site shows % contributions to GDP) especially housing. It is code for "Geeze, I hope that sinking housing sector doesn't take the rest of the economy with it, like that loud mouth Roubini says."
Some 3/4 of the GDP growth number accrue to consumption, which is tied to the housing industry in many ways but especially financing --allowing us to spend more than we earn. The Fed knows this of course and the special role that housing has in providing this consumption tap, but this does not enhance their respectability to talk openly about it.
Cheshire cat smiles all round.

[Martin]

Thanks, folks.

[ig]

"Some 3/4 of the GDP growth number accrue to consumption, which is tied to the housing industry in many ways but especially financing --allowing us to spend more than we earn."

That is the scariest part of this recovery. and I have yet to hear a legitimate argument that income is understated. and those arguments are out there on the evening "investment" television shows.

The Fed has a real problem. Consumption in one sector with relatively low inflation (CPI), is driven by inflation in another with previously high infation. housing.

If he raises rates he may accelerate a hard landing. If he stays too dovish he has to hope that consumer demand falls further and gets into his comfort rate <2% Core CPI.