FOMC Keeps Target Rate at 2%

As expected, the FOMC left the target federal funds rate unchanged:

Press Release, Release Date: June 25, 2008

The Federal Open Market Committee decided today to keep its target for the federal funds rate at 2 percent.

Recent information indicates that overall economic activity continues to expand, partly reflecting some firming in household spending.  However, labor markets have softened further and financial markets remain under considerable stress.  Tight credit conditions, the ongoing housing contraction, and the rise in energy prices are likely to weigh on economic growth over the next few quarters.

The Committee expects inflation to moderate later this year and next year.  However, in light of the continued increases in the prices of energy and some other commodities and the elevated state of some indicators of inflation expectations, uncertainty about the inflation outlook remains high.

The substantial easing of monetary policy to date, combined with ongoing measures to foster market liquidity, should help to promote moderate growth over time.  Although downside risks to growth remain, they appear to have diminished somewhat, and the upside risks to inflation and inflation expectations have increased.  The Committee will continue to monitor economic and financial developments and will act as needed to promote sustainable economic growth and price stability.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Donald L. Kohn; Randall S. Kroszner; Frederic S. Mishkin; Sandra Pianalto; Charles I. Plosser; Gary H. Stern; and Kevin M. Warsh.  Voting against was Richard W. Fisher, who preferred an increase in the target for the federal funds rate at this meeting.

[grr - my mistake - section removed  - one of those days I guess]

There aren't many clues about the future in the statement, but I read the statement as saying that, if anything, inflation is the bigger worry and rates are somewhat more likely to go up than to stay put. But neither course seems much preferred at this point. There are no hints the Fed is thinking it may need to lower rates in the foreseeable future.

Here is a side-by-side comparison of the last two statements, with some of the key differences highlighted. The most important change, in my opinion, is in the second row where it is noted that the Fed sees "some firming" in household spending:

June 25, 2008	April 30, 2008
The Federal Open Market Committee decided today to keep its target for the federal funds rate at 2 percent.	The Federal Open Market Committee decided today to lower its target for the federal funds rate 25 basis points to 2 percent.
Recent information indicates that overall economic activity continues to expand, partly reflecting some firming in household spending.  However, labor markets have softened further and financial markets remain under considerable stress.  Tight credit conditions, the ongoing housing contraction, and the rise in energy prices are likely to weigh on economic growth over the next few quarters.	Recent information indicates that economic activity remains weak. Household and business spending has been subdued and labor markets have softened further. Financial markets remain under considerable stress, and tight credit conditions and the deepening housing contraction are likely to weigh on economic growth over the next few quarters.
The Committee expects inflation to moderate later this year and next year.  However, in light of the continued increases in the prices of energy and some other commodities and the elevated state of some indicators of inflation expectations, uncertainty about the inflation outlook remains high.	Although readings on core inflation have improved somewhat, energy and other commodity prices have increased, and some indicators of inflation expectations have risen in recent months. The Committee expects inflation to moderate in coming quarters, reflecting a projected leveling-out of energy and other commodity prices and an easing of pressures on resource utilization. Still, uncertainty about the inflation outlook remains high. It will be necessary to continue to monitor inflation developments carefully.
The substantial easing of monetary policy to date, combined with ongoing measures to foster market liquidity, should help to promote moderate growth over time.  Although downside risks to growth remain, they appear to have diminished somewhat, and the upside risks to inflation and inflation expectations have increased. The Committee will continue to monitor economic and financial developments and will act as needed to promote sustainable economic growth and price stability.	The substantial easing of monetary policy to date, combined with ongoing measures to foster market liquidity, should help to promote moderate growth over time and to mitigate risks to economic activity. The Committee will continue to monitor economic and financial developments and will act as needed to promote sustainable economic growth and price stability.
Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Donald L. Kohn; Randall S. Kroszner; Frederic S. Mishkin; Sandra Pianalto; Charles I. Plosser; Gary H. Stern; and Kevin M. Warsh.  Voting against was Richard W. Fisher, who preferred an increase in the target for the federal funds rate at this meeting.	Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Donald L. Kohn; Randall S. Kroszner; Frederic S. Mishkin; Sandra Pianalto; Gary H. Stern; and Kevin M. Warsh. Voting against were Richard W. Fisher and Charles I. Plosser, who preferred no change in the target for the federal funds rate at this meeting.
	In a related action, the Board of Governors unanimously approved a 25-basis-point decrease in the discount rate to 2-1/4 percent. In taking this action, the Board approved the requests submitted by the Boards of Directors of the Federal Reserve Banks of New York, Cleveland, Atlanta, and San Francisco

Comments

[Marc Shivers]

CMIIW, but I don't think we'll know for certain if any of the banks requested a discount rate change until the Board minutes are released; I don't think the Committee statement mentions bank requests except when the Board approves a change.

I too would be surprised if Dallas didn't request a hike.

[Mark Thoma]

Thanks. I seem to be on a "say dumb things and post them" tear today.

I hate doing that. Maybe I need a break or something.

I took this part out, it's not correct. Only requests for changes that are approved are noted in the press release. Whether banks asked for a change in the discount rate or not, since the ff rate was unchanged, no proposals to change the discount rate would have been approved even if they were made, and they likely weren't, so nothing would be noted in the minutes.No banks asked for an increase in the discount rate. This means that, if the Board of Directors for each Fed was able to meet, none thought the discount rate should go up. Given that Fisher preferred an increase in the target rate, it's interesting that they did not submit a request toincrease the discount rate. Perhaps (a) they weren't able to get a Board meeting together and, though they would have preferred an increase in the discount rate, they did not submit a request, (b) the board of directors disagreed with Fisher and did not want a change in either the discount or target rates, (c) the Board supported a rate increase, but wanted a wider spread between the discount rate and the federal funds rate (it has been reduced to .5% from it's previous value of 1%). [Have I missed any possibilities?] My guess is that the Board's recommendation and Fisher's vote may did not have agree, but that's just a guess.

[JKH]

The most important point:

"The Committee expects inflation to moderate later this year and next year."

Although not much different than last time, it is a naked statement of the Fed's own inflation expectations, nothwithstanding the risks. It is also in stark contrast to the expected tightening sentiment that the market misconstrued from Bernanke's earlier June speech.

Near term (possibly the rest of the year), the Fed will probably be on hold. Fed funds futures continue to overestimate tightening risk.

[Andrew]

And we could tie the speculation/fed rate threads together with Frankel's graph.