Fed Sees Inflation As Bigger Threat Than a Slowdown (Sub. only), More Boosts in Rates Likely Despite Signs of Cooling; Debating Use of 'Measured,' By Greg Ip , The Wall Street Journal, April 29, 2005; Page A1
Despite signs that economic growth is slowing, the Federal Reserve sees signs of an upward creep in inflation as a bigger threat -- and is likely to keep raising interest rates in the months ahead to curb it.
On Tuesday, the Fed likely will raise the target for its key short-term interest rate to 3% from 2.75%. … Fed increases are likely to continue at subsequent meetings unless the economy slows much more than it already has. But officials are debating the wisdom of continuing to signal their intentions for interest rates as they have been.
… the timing of Mr. Greenspan's retirement could be a factor in Fed deliberations now … "Any central banker would rather risk a little bit weaker economy than a little bit higher inflation as part of your legacy," … Greenspan's fellow policy makers, meanwhile, "want to make sure his personal credibility as an inflation fighter stays with the institution," …
In the statement following its March 22 meeting … the Fed cited concerns about inflation for the first time in four years, suggesting it had lowered the bar for raising rates in larger, half-point increments. Since then, the economy's apparent loss of momentum has taken half-point increases off the table … But … it would take several more months of sub-par growth before they consider a pause in rate increases. … In speeches, Fed officials have continued to emphasize their inflation focus. …
The debate at next week's meeting likely will center on whether to continue to say rates will rise at a "measured" pace -- not over the rate change itself. … Minutes for the March meeting show some officials pressed to drop the word. … Some officials worry continued use of the word "measured," … could lead investors to think the Fed is more certain of its rate plans than it is ... However, removing the word "measured" could prompt some investors to think the Fed is about to raise rates by a half-percentage point. ... Whether officials stick with "measured" next week likely will depend in part on how they think markets will react. …
A related issue is how much longer the Fed will describe the federal-funds rate as "accommodative," that is, below some neutral level that neither stimulates nor restrains spending. Fed officials have said a neutral funds rate is somewhere between 3% and 5%, and by next week, the rate is expected to be in that range. But no Fed official has yet suggested that rates are close to neutral, which would imply the Fed was almost finished raising them.
1. It was almost certainly placed by Greenspan. You don't go front page with a piece like that unless you are sourced from the top.
2. On balance, FOMC members want to drop the term "measured." They do not want to step up the pace of rate increases. They want instead to have more flexibility about policy. This has always been a problem with the statement - it is often difficult to back off of a critical catch phrase.
3. If market participants take this column well, the odds of dropping the term "measured" rise.
4. The Fed is trying to dissuade investors from concluding that the Q1 growth slowdown is significant enough to dissuade their rate rising campaign. Critics will claim the Fed is ignoring potentially disastrous underlying economic imbalances, and that rising rates threaten to trigger a financial crisis (see DeLong's piece on hard-landings). But the Fed is always behind the curve. I would be surprised to see any shift in the course of policy prior to the Q2 GDP release in July.