The Fed Stays Put

As expected, the Federal Reserve left interest rates unchanged. This is the sixth straight time the Fed has held its powder. Here’s the statement:

The Federal Open Market Committee decided today to keep its target for the federal funds rate at 5-1/4 percent.
Recent indicators have been mixed and the adjustment in the housing sector is ongoing (old statement: “suggested somewhat firmer economic growth, and some tentative signs of stabilization have appeared in the housing market“). Nevertheless, the economy seems likely to continue to expand at a moderate pace over coming quarters.
Recent readings on core inflation have been somewhat elevated (old statement: “have improved modestly in recent months”). Although inflation pressures seem likely to moderate over time, the high level of resource utilization has the potential to sustain those pressures.
In these circumstances, the Committee’s predominant policy concern remains the risk that inflation will fail to moderate as expected (this is new, despite the word “remains”). Future policy adjustments will depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information.
Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Thomas M. Hoenig; Donald L. Kohn; Randall S. Kroszner; Cathy E. Minehan; Frederic S. Mishkin; Michael H. Moskow; William Poole; and Kevin M. Warsh.

Barry Ritholtz provides his own reality-based Fed statement:

The Federal Open Market Committee decided today to keep its target for the federal funds rate at 5-1/4 percent.
Recent indicators have been much worse than what we were hoping for: Housing is a bigger mess than we anticipated; Business Capex is heading south, as are durable goods. Retail sales have been punk for 3 months running, (and what’s with those excuses from the retailers? Too hot! Too cold! Lunar eclipse!) Don’t even ask about the Automakers. We expect the economy is likely to continue to soften until it slips to about a 1.5% GDP.
Even worse, recent readings on inflation have been elevated. We were hoping that inflation pressures would moderate as the economy stabilized, but no such luck. In these circumstances, the Committee’s predominant policy concern is that we have painted ourselves into a corner, and we are running out of options. On the one hand, Inflation remains an ongoing concern, as medical costs, food, and energy remain problematic. On the other hand, its is apparent that growth is cooling rapidly. Housing has flipped from a net positive for consumers and job seekers to a net negative.
All told, we are running out of options until one or the other of these gets much much worse. Future policy adjustments, therefire, will depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information. As noted above, if GDP slips below 1.5%, we will be shifting our bias towards easing. Appreciably worse that 1.5%, and we will have to act on rates to prevent a recession — inflation be damned.
On a final note, the FOMC has taken up a collection, and as a retirement present, we are sending former Chairman Alan Greenspan to a lovely spa on Fiji Island for the foreseeable future. Since there are no satellite feeds, internet connections or any off island communications at all — preferably, around December 2008.

Posted by on March 21st, 2007 at 2:15 pm


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