Tuesday, December 12, 2006

FOMC Statement

Here is a link to the Fed's statement.

Here are a few notes to mention before we get into parsing. The FOMC is not paid to issue panic warnings or be the world's greatest cheerleader for the economy. They are paid to be economic geeks. As such, they are paid to sound like economic geeks. Don't expect to hear statements like, "this is the best economy since this country started!" Expect to hear,, "The US economy is operating at maximum capacity with minimum inflationary pressures." That's about as close to cheerleading as you're going to get.

Also remember the FOMC statement is the investor's "play at home" version of Fed policy. The statement tells us what the Fed is looking at and what they are looking for. This allows greater transparency for the markets. This way when an economic number comes out that the Fed said it is looking at, we get to play along at home and make all sorts of conjectures about what the numbers actually means.

All that being said.....

They left rates unchanged. This is not a big surprise. Here's the rest of the statement.

Economic growth has slowed over the course of the year, partly reflecting a substantial cooling of the housing market. Although recent indicators have been mixed, the economy seems likely to expand at a moderate pace on balance over coming quarters.

Readings on core inflation have been elevated, and the high level of resource utilization has the potential to sustain inflation pressures. However, inflation pressures seem likely to moderate over time, reflecting reduced impetus from energy prices, contained inflation expectations, and the cumulative effects of monetary policy actions and other factors restraining aggregate demand.

Nonetheless, the Committee judges that some inflation risks remain. The extent and timing of any additional firming that may be needed to address these risks will depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information.

OK -- what does this mean in English?

1.) Housing is on the Fed's radar screen. So, for the next few months we'll watch the housing market. In addition, the Fed is pointing out that housing is the primary factor for the economy's recent cooling. So, in the next few months, we'll look to see if housing's influence is spreading into the economy in other areas like consumer spending, consumer sentiment and housing related employment.

2.) The Fed is still concerned about inflationary pressures, although they think a slowing economy will do the Fed's job of slowing inflation. However, this statement gives the Fed some wiggle room if they judge they need to raise rates.

In other words, nothing has really changed in Fed land.

A friend emailed the following observations about the FOMC statement:

Interesting to note the last four Fed statements have referred to the
housing market as follows:

"...gradual cooling of the housing market."

"...cooling of the housing market."

"...cooling of the housing market."

"...substantial cooling of the housing market."

Now there's a really subtle shift of phrase to catch.