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Tuesday, August 29, 2006

FOMC Meeting Minutes

The meeting minutes for the last FOMC meeting were released today. It's a pretty busy day, so I haven't had time to wade through them, but here's a few reactions from the Wall Street Journal, Financial Times, and Bloomberg. [Upate: William polley too.] First, the Wall Street Journal:

Further Rate Increases Are Possible, According to Fed-Meeting Minutes, by Greg Ip, WSJ: Many Federal Reserve policy makers felt their decision to leave interest rates unchanged this month was a "close call" and further increases "could well be needed," minutes to the Fed's meeting show.

At that Aug. 8 meeting, the Fed left its short-term interest rate target unchanged at 5.25%... Only one of the 10 voting members of the ... Federal Open Market Committee dissented from that decision. Jeffrey Lacker ... advocated an additional increase. But the minutes ...suggest other members may have shared his concerns, though not enough to formally dissent...

Th[e] wording suggests the Fed saw a good chance rates won't have to rise further, but officials didn't want to foreclose the possibility. They wanted their postmeeting statement to "convey that inflation risks remained dominant" and that the pause "did not necessarily mark the end of the tightening cycle." Moreover, they characterized the purpose of the pause as enabling them to "accumulate more information before judging" whether further increases would be needed and "to limit the risk of tightening too much."

In the minutes, the risk of higher inflation was described as "significant" and "appreciable," stronger than the statement released at the time, which simply said "some inflation risks remain." ...

Fed officials also discussed ways to improve communications, but reached no concrete conclusions. ...

Next, the Financial Times:

Fed minutes point to ‘close call’ on rate pause, by Richard Beales, Financial Times: Stocks and bonds rose on Tuesday afternoon after the minutes of the last Federal Reserve interest rate-setting meeting revealed no apparent urgency to raise rates again. The minutes bolstered market expectations that further rate rises this year are unlikely.

The minutes referred to the Federal Open Market Committee’s decision to hold interest rates steady earlier this month as “a close call”, but also said most committee members thought inflationary pressures would “ease gradually” and that current policy could prove “consistent with satisfactory economic performance”.

Nonetheless, the committee emphasised that inflation risks remained and that further rate rises could be necessary to fight it...

And Bloomberg:

Fed Pause 'Close Call'; Officials Unsure of Outlook, by Scott Lanman and Rich Miller, Bloomberg: Federal Reserve officials saw their decision to suspend a two-year run of interest-rate increases as a ''close call'' and weren't entirely sure of the need for further tightening, records of their last meeting showed. ... ''Members generally saw limited risk in deferring further policy tightening that might prove necessary.''

That risk may be further diminished by reports since then showing slumps in home sales and consumer confidence as well as signs of slowing inflation. The minutes didn't indicate whether Richmond Fed President Jeffrey Lacker, who opposed the decision, had much support in his argument for an 18th straight increase. ...

The pause would give the FOMC time to digest more information, the minutes said. ''The full effect of previous increases in interest rates on activity and prices probably had not yet been felt, and a pause was viewed as appropriate to limit the risks of tightening too much,'' the report said. ...

My read of their read of the minutes is that given the data we have seen so far since the last meeting, a continued pause is most likely. But if there's any hint of accelerating inflation or rising inflation expectations, the FOMC wants to be clear that it will not rule out additional rate hikes. There's a lot of data yet to come between now and the next meeting.

Update: William Polley had time to say a bit more.

    Posted by on Tuesday, August 29, 2006 at 02:44 PM in Economics, Monetary Policy | Permalink  TrackBack (0)  Comments (2)


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