The Fed left interest rates at 5.25 percent for the 11th month. The last time they changed interest rates was in June 2006. With the central bank so committed to fighting inflation, we do not expect a rate cut until the fourth quarter, at the earliest.
Their decision to leave both interest rates and the tone of the statement mostly unchanged was not surprising. The Fed acknowledged that there was weakness in growth in the “first part of the year,” but their “predominant policy concern remains the risk that inflation will fail to moderate as expected.” The combination of a weak dollar and record average gasoline prices gave the Fed no choice but to continue to lean harder on inflation.
This is not the first time that we have seen Team Bernanke put inflation ahead of growth. Remember, first quarter GDP was the slowest in 4 years while non-farm payrolls in the month of April reported the weakest rise since December 2004. With 7 weeks till the next FOMC meeting (June 27/29), the Fed has chosen to delay any major changes to the language in the statement until they see evidence that the recent slowdown in growth is here to stay. The improvement in jobless claims last week provided a glimmer of hope that the labor market may not be as bad as the recent NFP and household survey suggests. However we will need to see a few more readings around those same levels to be convinced. In the meantime, in an environment where the European Central Bank and Bank of England are still set to raise rates, the dollar will most likely stage a limited rally against the Euro and British pound. We could see a further continuation in the USD/JPY on the other hand as the latest Fed decision lengthens the life expectancy of long USD/JPY carry trades.
Comparing the FOMC Statements
May 9, 2007
The Federal Open Market Committee decided today to keep its target for the federal funds rate at 5-1/4 percent.
Economic growth slowed in the first part of this year and the adjustment in the housing sector is ongoing. Nevertheless, the economy seems likely to expand at a moderate pace over coming quarters.
Core inflation remains 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: 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.
March 21, 2007
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.
By Kathy Lien, Chief Strategist of DailyFX.com