« Fed Leaves Target Rate Unchanged at 5.25% | Main | Debating CEO Pay »

Wednesday, October 25, 2006

Fed Watch: Staying the Course

Tim Duy reviews today's rate decision:

Staying the Course, by Tim Duy: The FOMC delivered no big surprises at the conclusion of today’s FOMC meeting; policy is held constant with a bias toward further tightening. Fears of additional hawkishness proved to be unfounded. And Richmond Fed President Jeffery Lacker continues to dissent, uncomfortable with Chairman Ben Bernanke’s willingness to let core inflation ease slowly back below 2%. Lacker is concerned that the longer inflation is high, the more likely it becomes that inflation expectations will creep up to match. Not an unreasonable position, but one that is out of line with the rest of the FOMC.

Two changes in the statement caught my eye. The first was the return to an explicit forecast: “Going forward, the economy seems likely to expand at a moderate pace.” “Moderate” is code for “soft landing.” With resource utilization at a high level, moderate growth implies only a gradual easing of inflation. Without more a more rapid deceleration in underlying economic activity, expect rates to be on hold for a time. The Fed does.

The second change was to eliminate energy as both a cause of inflationary pressures and a reason to believe inflation would moderate. I criticized the last statement on this point. My criticism, however, likely did not sway the FOMC to drop energy as an inflationary factor. What did sway Bernanke & Co. is the obvious drop in retail gasoline prices, not to mention lower oil and natural gas prices. Watch oil – prices drops have disappointed in the past.

I expect the Fed to be on hold in December as well. The next opening for a policy change is in January. By that time we will have an idea if growth reaccelerated in Q4. Higher consumer confidence and lower gas price suggest a solid start to the quarter. Can it last in the face of an ongoing housing slowdown?

    Posted by on Wednesday, October 25, 2006 at 03:45 PM in Economics, Fed Watch, Monetary Policy | Permalink  TrackBack (2)  Comments (4)


    TrackBack URL for this entry:

    Listed below are links to weblogs that reference Fed Watch: Staying the Course:

    » Bottoming Out? Part 3 from macroblog

    With an assist from Bizzy Blog comes this take on the future of the housing market, from J. Benson Durham at the Federal Reserve Board of Governors: ... this paper addresses the first three moments of investors' expectations for home prices in par... [Read More]

    Tracked on Wednesday, October 25, 2006 at 10:45 PM

    » A Brief History of Pauses by the Fed from The Street Light

    With the Fed's action yesterday, the Fed funds rate will remain at its current 5.25% at least until December (barring something really dramatic and unforseen) - which means that the pause in changes in the Federal Funds rate will be at least 163 days... [Read More]

    Tracked on Thursday, October 26, 2006 at 09:27 AM


    Feed You can follow this conversation by subscribing to the comment feed for this post.