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

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From: zonder	3/23/2005 5:03:38 AM
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Fed Subtly Moves View On Inflation, Growth and Displays Divisions On Growth the differences between the march and February statements are as follows.... In February the FOMC argued that, "Output appears to be growing at a moderate pace..." In March this changes to, "Output evidently continues to grow at a solid pace." The difference between "moderate" and "solid" displays greater confidence in the sustainability and pace of economic momentum in this cycle. On Inflation the differences are as follows.... In February, "Inflation and inflation expectations remain well contained." By March this changes to, "Though longer term inflation expectations remain well contained, pressures on inflation have picked up in recent months and pricing power is more evident. The rise in energy prices, however, has not notably fed through to core consumer prices." The March view is expressing a nuanced view that pricing power is returning to producers but this has not yet fed through the price chain to core consumer prices. On the moderate pace phrase, there is also a subtle change. In February, the text argues that, "With underlying inflation expected to be low..." In March this changes to, "With underlying inflation expected to be contained..." What is the difference between "low" and "contained"? For us "low" is unambiguously moderate while "contained" suggests that while inflation is low, there is pent-up inflation pressure in the pipeline." One might well ask the question whether inflation can remain "contained" if "pricing power is more evident"? Conclusion: The text displays a degree of contradiction (see the previous sentence in this report) and subtle change in view. The fact that the "moderate pace" phrase is retained signals that the doves are still in charge for the time being. We should also remember that the degree of accommodation is being reduced. Flexible gradualism remains the guiding strategy of the FOMC and an acceleration in pace is only hinted at as a possibility (for the minority) in this text.

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