Interest Rate Roundup

Wednesday, March 21, 2007

Hawkish talk from the Fed?

Here's the just-released text of the Federal Open Market Committee's statement:

The Federal Open Market Committee decided today to keep its target for the federal funds rate at 5-1/4 percent.

Recent indicators have been mixed and the adjustment in the housing sector is ongoing. Nevertheless, the economy seems likely to continue to expand at a moderate pace over coming quarters.

Recent readings on core inflation have been somewhat elevated. Although inflation pressures seem likely to moderate over time, the high level of resource utilization has the potential to sustain those pressures.

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.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Thomas M. Hoenig; Donald L. Kohn; Randall S. Kroszner; Cathy E. Minehan; Frederic S. Mishkin; Michael H. Moskow; William Poole; and Kevin M. Warsh

At first blush, this statement looks hawkish to me -- meaning it clearly focuses on the risk of inflation. And no wonder, as I pointed out in this post on the Consumer Price Index and this post on the Producer Price Index, the key inflation indicators are not moderating. Core CPI is running at a 2.7% year-over-year rate, well above the 1% to 2% Fed comfort zone. The core PPI jumped twice as much as expected in February, and both core intermediate and crude goods climbed at the fastest rate in months.

The Fed's growth outlook was somewhat tempered this time around. Last time, the Fed highlighted indicators that "suggested somewhat firmer economic growth" and added that "some tentative signs of stabilization have appeared in the housing market." But I don't see much, if any, reason to expect an imminent rate cut based on this statement.


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