Economist's View: The FOMC Holds Target Rate at 5.25%
リンク: Economist's View: The FOMC Holds Target Rate at 5.25%.
No surprise, the Fed left the target rate at 5.25%. But the accompanying statement is a bit of a departure from the Fed's last few statements issued after FOMC target rate decisions. The statement says:
1. The Fed is more confident about the potential for sustained growth. The statement notes "somewhat firmer growth" in the economy as well as "signs of stabilization ... in the housing market."
2. The Fed believes that core inflation has improved - it has moderated as expected - and it expects further moderation in the future. However, the statement notes the potential for high levels of resource utilization to "sustain inflation pressures."
3. The balance of risks is still tilted toward inflation, but it does not appear the risk is as high as the committee has assessed in the past.
4. There was no dissent, but that is likely due to the rotation in the committee with the new year. Jeffrey Lacker, who has been dissenting recently, is a non-voting member for this year.
Overall, except for the remaining upside risks for inflation, the Fed appears pleased with the economy's current trajectory. [See William Polley and Kash Mansori for more.]
| January 31, 2007 Statement | December 12, 2006 Statement |
| The Federal Open Market Committee decided today to keep its target for the federal funds rate at 5-1/4 percent. | The Federal Open Market Committee decided today to keep its target for the federal funds rate at 5-1/4 percent. |
| Recent indicators have suggested somewhat firmer economic growth, and some tentative signs of stabilization have appeared in the housing market. Overall, the economy seems likely to expand at a moderate pace over coming quarters. | 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 improved modestly in recent months, and inflation pressures seem likely to moderate over time. However, the high level of resource utilization has the potential to sustain inflation pressures. | 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. |
| 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. | 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. |
| Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Susan S. Bies; Thomas M. Hoenig; Donald L. Kohn; Randall S. Kroszner; Cathy E. Minehan; Frederic S. Mishkin; Michael H. Moskow; William Poole; and Kevin M. Warsh. | Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Susan S. Bies; Donald L. Kohn; Randall S. Kroszner; Frederic S. Mishkin; Sandra Pianalto; William Poole; Kevin M. Warsh; and Janet L. Yellen. Voting against was Jeffrey M. Lacker, who preferred an increase of 25 basis points in the federal funds rate target at this meeting. |
Posted by Mark Thoma on January 31, 2007 at 12:22 PM in Economics, Monetary Policy | Permalink | Comments (10)
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Comments
Different but related.............
The argument on income inequality is apparently over.
President Bush apparently settled the argument today on Wall Street in his speech.
Wonder what Alan Reynolds and Larry Kudlow have to say?
Posted by: save_the_rustbelt | Jan 31, 2007 12:37:45 PM
Agreed, agreed. This economic experience parallels that in selected developed markets amid swells and ebbs in housing and along with the muted impacted of rising energy prices these last 5 years. Federal Reserve policy appears to have been terrific so far through this cycle.
[Nouriel Roubini's worries are completely understandable, but so far happily not realized.]
Posted by: anne | Jan 31, 2007 12:47:30 PM
The Goldilocks scenario is 3% growth from 1% hours worked or employment and 2% productivity. This keep wages and unit labor cost from accelerating so that inflation and rates can stay flat. This time we apparently got 3.5% real growth from 2% hours worked and 1.5% productivity. This implies that employment growth is too strong and productivity growth is too weak to sustain the conditions necessary for stable wages growth with flat inflation and interest rates.
Posted by: spencer | Jan 31, 2007 1:43:49 PM
Spencer mentions the Goldilocks scenario. Goldilocks is a term that Lawrence Kudlow used yesterday when he said 2006QIV was 3.5%. And lo and behold, that was the number used by BEA this morning. Alas, Larry thought yesterday that investment demand was growing. Over at Angrybear, we provide the BEA report along with Larry's Corner comment from yesterday.
Posted by: pgl | Jan 31, 2007 2:23:28 PM
Notice how far wrong growth projections for the economy were near summer's end, but more importantly notice the fears expressed for the stock market. Fears expressed however are not necessarily realized and the last 3 months of the year were terrific for conservative investors, with gains pronounced enough that a bear market beginning tomorrow would make little difference to stable investors just as the bear market of 1987 made little or no difference to stable investors. The current market has indeed been most rewarding to conservative investors, which may give a measure of confidence from here. Timing is so hard for the finest of timers, and I am wonder who the finest are.
Posted by: anne | Jan 31, 2007 4:22:06 PM
Speaking of projections gone wrong the Bureau of Public Debt issued year end balances for the Social Security Trust Funds yesterday.
OAS plus DI = $2.0492 trillion
Low Cost projection = $2.0380 trillion
Intermediate cost = $2.0353 trillion
http://www.publicdebt.treas.gov/dfi/dfitrustfundreport.htm
Spencer may be right that the balance between hours worked and productivity is off. On the other hand 12.4% of payroll just keeps rolling in.
(Whistles nonchalantly and wanders off)
Posted by: Bruce Webb | Jan 31, 2007 4:59:08 PM
Bruce, nice :)
Posted by: anne | Jan 31, 2007 5:23:24 PM
"This implies that employment growth is too strong and productivity growth is too weak to sustain the conditions necessary for stable wages growth with flat inflation and interest rates."
EPI has a graph http://www.epi.org/printer.cfm?id=2609&content_type=1&nice_name=webfeatures_viewpoints_globalization_works_4all showing the almost total disconnect between productivity growth and median wages since 1979.
Has productivity growth been so weak for decades now that conditions are not right for wage growth?
Posted by: dale | Jan 31, 2007 5:36:47 PM
Dale:
"Has productivity growth been so weak for decades now that conditions are not right for wage growth?"
Precisely; imagine the fear, the fear I say, of someone anyone anywhere ever getting a raise (bosses not included). What I am much grateful to Alan Greenspan for is experimentally allowing growth higher than even Democratic conservatives could stand for, and guess what happened, well lower unemployment, lower inflation, and lots of wage increases.
Posted by: anne | Jan 31, 2007 5:56:23 PM
Also the low and lower interest rate cycle of Alan Greenspan beginning in January 2001 was precisely what was needed, though better fiscal policy was needed as well.
[Brad Setser was warning of 7% long term Treasury interest rates, but no such animal spotted as yet.]
Posted by: anne | Jan 31, 2007 6:01:16 PM
