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Wednesday, September 20, 2006 11:23 PM

September FOMC Analysis

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People always beat me to these comparisons but I thought it might be helpful to pass on the best of the FOMC statement to statement comparisons.

In The Fed Leaves Target Rate Unchanged at 5.25% Mark Thoma writing for the Economist's View points out every single word change from last month to this month.

  1. They have dropped the word "gradual" from their description of the cooling of the housing market.
  2. They see energy prices as moderating. The statement no longer mentions energy prices as a potential cause of slower growth, but energy prices are mentioned as a reason to expect inflation to moderate.
  3. Just like last meeting, the vote wasn't unanimous - Jeffrey Lacker dissented.
  4. The Committee notes, as it did last meeting, that inflation risks remain and further rate moves will depend upon how these risks play out. It does not mention risks to economic growth explicitly as it does with inflation, but housing is mentioned as a growth moderating factor.
Note: There is a chart of the exact before and after statements in the above link and the above four points sound more significant than they look in the chart (and from my ears they do not sound very significant at all). Besides point #3 above is not even a difference.

Tim Duy called the statements Unsatisfying.
Like almost everyone, I was expecting policy to remain essentially unchanged at the conclusion of today’s FOMC meeting. Still, I was left unsatisfied by the accompanying statement, posted by Mark Thoma. At best, its brevity makes it look straightforward. At worst, it looks like something cobbled together because FOMC members were unable to reach a uniform opinion on the state of the economy.

They only mention the housing slowdown in explaining why the economy “appears” to be moderating. If that was the only factor they are looking at, wouldn’t you expect a more definitive forecast? As Jim Hamilton reminds us, you can’t exactly miss the relationship between housing and recessions. If housing is your focus, cut rates now! They didn’t cut rates, so there must be more. So where is the rest of their analysis? What are the factors that offset the housing slowdown? Inquiring minds want to know.

OK, so they don’t completely know which way the economy is headed; not entirely unexpected, given that the US economy is almost certainly at an inflection point (although I like to see a bit more confidence from my central bankers, or at least another explanatory sentence). But I would expect the Fed to have a better handle on the inflation situation. Unfortunately, the third paragraph doesn’t leave me very confident on that front either. In the first sentence, energy prices have the “potential to sustain inflation pressures.” In the second sentence, inflation pressures are likely to moderate due to the “reduced impetus from energy prices.” What? WHAT!?! Are energy prices contributing to inflation or not? Shouldn’t the FOMC have an opinion on the impact of energy prices on inflation?
The person best summing up the silliness of it all was Kevin Depew at Minyanville who offered this analysis:
  • Fed's Lacker dissents, asked for hike (didn't get it)
  • Energy prices have the potential to sustain inflation (doesn't mention CRB Index breaking down or Crude down 19%, Natural Gas down 30% and unleaded gas down 32% since the last FOMC meeting)
  • Inflation Pressures also likely to moderate (due to reduced impetus from energy)
  • Further tightening may be needed (though apparently not soon enough for Lacker)
  • Repeats housing is "cooling" (removes the word "gradual")
So, to sum up, the housing market is now "cooling," though no longer "gradually cooling," and energy prices can potentially sustain inflation while the reduced impetus from energy prices will cause inflationary pressures to moderate. Got it?

Mike Shedlock / Mish

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