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Thursday, June 30, 2005

Fed Watch: Not Ready to Say “Uncle”

Tim Duy's Fed Watch continues:  Today’s policy statement should leave little doubt that Greenspan & Co. intend to continue raising rates.  Indeed, I was somewhat surprised to see a statement that, in my view, hardened the Fed’s more optimistic outlook for economic activity.  From the May statement:

Recent data suggest that the solid pace of spending growth has slowed somewhat, partly in response to the earlier increases in energy prices.  Labor market conditions, however, apparently continue to improve gradually. Pressures on inflation have picked up in recent months and pricing power is more evident. Longer-term inflation expectations remain well contained.

But from today’s statement:

Although energy prices have risen further, the expansion remains firm and labor market conditions continue to improve gradually.  Pressures on inflation have stayed elevated, but longer-term inflation expectations remain well contained.

The failure to characterize spending growth as slowing is, I believe, the notable shift in the policy outlook.  Of course, with the upward revision in Q1 GDP growth, there exists a solid argument for the shift.

I did anticipate maintaining the terms “accommodative” and “measured” which signal that they are not prepared to stop raising rates.  I thought, however, that the FOMC would acknowledge the downside risks (weak manufacturing surveys and underlying durable goods numbers, for example), and I was off base here (in contrast to William Polley’s comments to my last post).  In short:  The thinking in the FOMC remains more optimistic on growth compared to the view of many market participants.  FOMC members do not believe they have entered the ninth inning.  The FOMC intends to continue raising rates, and likely do not have an end target in mind. 

[Note:  Additional discussions are at Angry Bear here and here, and at The Big Picture.]

    Posted by on Thursday, June 30, 2005 at 12:41 PM in Economics, Fed Watch, Monetary Policy | Permalink  TrackBack (0)  Comments (0)

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