FOMC Trivia : Most of the Fed's actions and words today were no surprise at all. But there were two
minors items that will receive some attention due to the lack of anything else to talk about. First, there
was one very slight change in the Fed's announcement vs its June announcement. Instead of noting weak
expansion of consumption the FOMC said that household demand has been sustained. Big deal, right?
Well, no, probably not. No one knows what consumer spending will do next, and that is in fact the
$64K question. This slight change in wording probably doesn't reflect increased optimism, and even if it
does, it could be blown out of the water with one weak retail sales report (Addition: a reader correctly
noted that this line could be interpreted as increased pessimism as well, since now there is only
reference to "sustained" demand rather than expansion). The other item that will be discussed is the
so-called easing bias. Most market-watchers have forgotten that the Fed did away with the bias back at
the beginning of 2000. They were tired of the market assuming that the bias suggested that an
intermeeting move was likely or that a future move in the direction of the bias was a guarantee. They
opted instead for a directive which noted the balance of risks. Instead of indicating a bias to ease or
tighten, they now indicate whether they see the balance of risks weighted in the direction of inflation or
recession, or weighted evenly. Of course, the market simply continued to label these three options as a
tightening bias, easing bias, and neutral directive (some prefer the oxymoron neutral bias). But the Fed
wanted only to convey its view of the economy, and that is indeed all that this statement has been. Some
thought that perhaps the Fed would shift to neutral today, and that the continued easing bias was
therefore meaningful. It wasn't. Those who understand that this is a balance of risks would also
understand that it would have been absurd to argue that the balance of risks is now equally weighted
between inflation and recession. Recession clearly remains the greater concern. This doesn't guarantee
future Fed easing; it's just a statement of the obvious. If you're looking for hints as to the next Fed
move, don't look in this Fed announcement. Look instead at upcoming economic reports - the Fed is
waiting for those just like the rest of us. - Greg Jones, Briefing.com
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speaking of biases, i think it was a critical mistake that the fomc left a tightening bias back in november 2000 in the face of rising energy prices, and when it was CLEAR that there were deflationary pressures. this is was the last chance to save the economy and instead everything fell off a cliff in december... and the rest is history... |
