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Strategies & Market Trends : Mish's Global Economic Trend Analysis -- Ignore unavailable to you. Want to Upgrade?

To: mishedlo who wrote (26161)	3/22/2005 11:15:59 PM
From: CalculatedRisk	Read Replies (2) \| Respond to of 116555

Here is a great discussion of the Fed today (by a former Fed economist): The FOMC Statement: Can You Hear Me Yet? macroblog.typepad.com And I think William Polley is worth reading too: williampolley.com

To: mishedlo who wrote (26161)	3/23/2005 4:17:20 AM
From: zonder	Respond to of 116555

Bear Stearns - FED WATCHING 22 March 2005 Fed shakes up statement to acknowledge growing inflation risks • Although the Fed raised interest rates by a quarter point to 2¾%, as expected, and maintained both the “measured” and “accommodative” language, this statement marks a significant shift to greater concern about inflation than the Fed has acknowledged to date. The vote to raise rates to 2¾% was unanimous. • In particular, the Fed added “pressures on inflation have picked up in recent months and pricing power is more evident,” and broadened high oil prices from a potential growth concern only to a potential inflation concern as well by adding that “The rise in energy prices, however, has not notably fed through to core consumer prices.” • Also, the Fed changed the nature of the balance of risks on prices being roughly equal from an unconditional statement to a conditional statement. The balance of risks statement now reads, “The Committee perceives that, with appropriate monetary policy action, the upside and downside risks to the attainment of both sustainable growth and price stability should be kept roughly equal,” whereas the last statement said, “The Committee perceives the upside and downside risks to the attainment of both sustainable growth and price stability for the next few quarters to be roughly equal.” • The Fed also upgraded its language on economic growth by saying “Output evidently continues to grow at a solid pace,” whereas in February the Fed said, “Output appears to be growing at a moderate pace.” • Although the Fed maintained the measured language on likely policy moves, the Fed altered the language slightly to recognize that inflation risks have moved higher. The Fed said, “With underlying inflation expected to be contained, the Committee believes that policy accommodation can be removed at a pace that is likely to be measured,” whereas the previous statement read that “inflation expected to be relatively low.” Note that the policy paragraph did not describe inflation as expected to be well contained. The Fed policy statement read (emphasis is ours): The Federal Open Market Committee decided today to raise its target for the federal funds rate by 25 basis points to 2-3/4 percent. The Committee believes that, even after this action, the stance of monetary policy remains accommodative and, coupled with robust underlying growth in productivity, is providing ongoing support to economic activity. Output evidently continues to grow at a solid pace despite the rise in energy prices, and labor market conditions continue to improve gradually. 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 Committee perceives that, with appropriate monetary policy action, the upside and downside risks to the attainment of both sustainable growth and price stability should be kept roughly equal. With underlying inflation expected to be contained, the Committee believes that policy accommodation can be removed at a pace that is likely to be measured. Nonetheless, the Committee will respond to changes in economic prospects as needed to fulfill its obligation to maintain price stability. Voting for the FOMC monetary policy action were: Alan Greenspan, Chairman; Timothy F. Geithner, Vice Chairman; Ben S. Bernanke; Susan S. Bies; Roger W. Ferguson, Jr.; Edward M. Gramlich; Jack Guynn; Donald L. Kohn; Michael H. Moskow; Mark W. Olson; Anthony M. Santomero; and Gary H. Stern. BOTTOM LINE: This statement represents a welcome acknowledgement by the Fed of the growing inflation risks that we have been warning about for some time. While maintaining the measured language does not suggest the immediate threat of a half-point rate move at the May 3 FOMC meeting, the statement provides ample warning that the Fed will act more aggressively if the inflation picture deteriorates significantly from here. We remain of the view that the funds rate target will be 4½% by the end of the year and will reach 5% in the first half of 2006.