The FOMC has spoken, and as expected rates were left unchanged at 5.25%. Here were they key phrases we looked at:
The Federal Open Market Committee decided today to keep its target for the federal funds rate at 5-1/4 percent. Economic growth was moderate during the first half of the year. Financial markets have been volatile in recent weeks, credit conditionshave become tighter for some households and businesses, and the housingcorrection is ongoing. Nevertheless, the economy seems likely tocontinue to expand at a moderate pace over coming quarters, supportedby solid growth in employment and incomes and a robust global economy.
Readings on core inflation have improved modestly in recent months.However, a sustained moderation in inflation pressures has yet to beconvincingly demonstrated. Moreover, the high level of resourceutilization has the potential to sustain those pressures.
Although the downside risks to growth have increased somewhat, theCommittee’s predominant policy concern remains the risk that inflationwill fail to moderate as expected. Future policy adjustments willdepend on the outlook for both inflation and economic growth, asimplied by incoming information.
The Statement from the June 28, 2007 meeting still noted moderate growth despite the ongoing adjustment in the housing sector. The FOMC needed to address this housing to include serious recent changes in lending markets. It also previously said it expected the economy to continue to expand at a moderate pace over coming quarters. The FOMC also stated on June 28: In these circumstances, the Committee’s predominant policy concern remains the risk that inflation will fail to moderate as expected. Future policy adjustments will depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information.
No one was expecting a rate cut today. What was expected was more accomodative and easier language that showed concern about the credit markets. The FOMC isn’t showing any real concern over the market malaise in housing and the liquidity crunch seen in the credit markets. This is not going to be viewed a Federal Reserve that is nervous nor one that is going to come to the rescue any time soon. So far the DJIA, S&P 500, and NASDAQ have dropped well into negative territory since Bernanke & Co. have spoken. The market probably won’t think these guys are completely asleep at the wheel, but there definitely isn’t any sense of this FOMC wanting to be a guardian angel.
Many of these initial post-FOMC market reactions are rapidly reversed, and the Fed-Speak language here is always open to at least some ongoing interpretation.
Jon C. Ogg
August 7, 2007
Jon Ogg can be reached at email@example.com; he does not own securities in the companies he covers.