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Strategies & Market Trends : Mish's Global Economic Trend Analysis

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From: zonder	12/15/2004 8:43:54 AM
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FOMC - Fed Sends Subtle Signals Via The Text Some analysts feared a "bearish" turn in the text of the decision which confirmed a widely-anticipated 25bp rate rise in the Fed funds rate. Some feared that the "moderate" pace phrase would be deleted- it WAS NOT DELETED. Other analysts expected- even feared - that the bias statement would be changed from "Balanced" (neutral)to "Tightening" (inflation). This DID NOT CHANGE. So what did change compared to the previous (Nov 10) statement? The answer is instructive. The main change was this. In the previous statement, the text read unequivocally, "...labour market conditions HAVE IMPROVED." By contrast, the latest statement argues that, " Labour market conditions APPEAR to improve GRADUALLY." This is a subtle BUT SIGNIFICANT change. This is more heavily qualified than the ultra confident earlier remark about the labour market and reflects the reality of the labour market. The latest nonfarm payrolls data DOES GIVE GROUNDS TO BE LESS OPTIMISTIC ABOUT GROWTH. Conclusion: The Fed is committed to a FLEXIBLE gradualism in its approach to raising rates. The data from the US economy has NOT been unequivocally strong and rates are now moving closer to (but still not at) neutrality. The Fed can afford to await the data flow until the next FOMC on Feb 2nd. If the data continues to be mixed, there will be pauses ahead in the tightening process. As the Fed has indicated, the neutral real rate is lower than historical precedent would suggest

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