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May 24, 2005

FOMC Minutes: Downside Risks to Growth, Upside Risks to Inflation, But Continued Measured Changes Expected

The Fed meeting minutes are out and for me this paragraph summarizes their stance fairly well. If there is any news, it is that the committee expressed a bit more concern over rising inflation and inflationary expectations than I anticipated, though that won't be surprising to everyone. There was also discussion of removing the "measured pace" language, but since the statement is clearly conditional upon future inflation, economic growth, and other economic conditions the committee decided to retain the language. The message is that any apparent change in the underlying trend for inflation or growth (more than a few monthly reports indicating weakness or strength in particular areas) could cause the Fed to deviate from the "measured pace." Here is the summary paragraph:
Minutes of the Federal Open Market Committee, May 3, 2005: … In the Committee's discussion of monetary policy for the intermeeting period, all members favored raising the target federal funds rate 25 basis points to 3 percent at this meeting. Although downside risks to sustainable growth had become more evident, most members regarded the recent slower growth of economic activity as likely to be transitory. In this regard, the ability of the U.S. economy to withstand significant shocks over recent years buttressed the view that policymakers should not overreact to a comparatively small number of disappointing indicators, especially when economic fundamentals appeared to remain quite supportive of continued solid expansion. To be sure, the Committee had raised its federal funds rate target appreciably over the past year, and, in the view of a few members, a larger-than-expected moderation of aggregate demand in response to this cumulative policy action could not be ruled out. However, all members regarded the stance of policy as accommodative and judged that the current level of short-term rates remained too low to be consistent with sustainable growth and stable prices in the long run. Against the backdrop of the recent uptick in core inflation and in some measures of inflation expectations, members agreed that they should continue along the course of removing policy accommodation at a measured pace conditional on the outlook for inflation and economic growth…

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