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Tuesday, February 21, 2006

FOMC Meeting Minutes Leave Room for More Rate Hikes

The Fed released its minutes from the last FOMC meeting. No surprises. While rates are nearing their destination, the committee expresses more worry about the inflation risk than the risk to output growth and is poised to raise rates again if needed. The bias is toward further rate increases, but all members agree that the next move is far more data dependent than other recent moves:

Minutes of the Federal Open Market Committee January 31, 2006: ...The information reviewed at this meeting suggested that underlying growth in aggregate demand remained solid, even though the expansion of real GDP was estimated to have slowed in the fourth quarter. ... Headline consumer inflation had been held down by falling consumer energy prices; more recently, however, crude oil prices climbed back up to high levels. Meanwhile, core inflation had moved up a bit from low levels seen last summer. ...

In their discussion of the economic situation and outlook, meeting participants noted the slowing in GDP growth in the fourth quarter of 2005, but believed that it probably owed in large part to transitory factors ... In that regard, several high frequency indicators of production, labor markets, and private demand suggested greater underlying strength of late than had been reflected in the most recent GDP data. ... Most participants expected core inflation to move up slightly in the near term, reflecting some pass-through of increased energy and other commodity prices. ...

In their discussion of major sectors of the economy, meeting participants noted that ... anecdotal reports contributed to a view that consumer spending had been solid over the holiday season and in recent weeks, while measures of consumer confidence remained high. Nevertheless, signs of slowing in the housing sector had become more evident... In some areas, home price appreciation reportedly had slowed noticeably, highlighting the risks to aggregate demand of a pullback in the housing sector. ... The most likely outlook, however, was for a gradual moderation in house price appreciation and in the growth of consumption, which would continue to be supported by increases in jobs and incomes. ...

In the Committee's discussion of monetary policy for the intermeeting period, all members favored raising the target federal funds rate 25 basis points to 4-1/2 percent ... Although recent economic data had been uneven, the economy seemed to be expanding at a solid pace. Members were concerned that, even after their action today, possible increases in resource utilization and elevated energy prices had the potential to add to inflation pressures. Although the stance of policy seemed close to where it needed to be given the current outlook, some further policy firming might be needed to keep inflation pressures contained and the risks to price stability and sustainable economic growth roughly in balance. In the view of some members, the possibility of additional policy moves was reinforced by readings on core inflation and inflation expectations that were somewhat higher than was desirable over the long run. However, all members agreed that the future path for the funds rate would depend increasingly on economic developments and could no longer be prejudged with the previous degree of confidence.

As this meeting marked Alan Greenspan's last ..., meeting participants took the opportunity individually and collectively to pay tribute to his many years of outstanding service to the Federal Reserve and to the nation. They expressed their appreciation for his collegial and successful leadership of the Committee and of the Federal Reserve System and emphasized the privilege and honor they felt in having served with him...

See also Washington Post, Bloomberg, WSJ, Financial Times, William Polley

    Posted by on Tuesday, February 21, 2006 at 03:51 PM in Economics, Monetary Policy | Permalink  TrackBack (0)  Comments (1)


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