What The Fed Said

Parsing through an FOMC statement is always fun, this time it is also interesting. The Fed has moved from forward-looking statements on inflation, resource utilization, and the moderation in growth, to the here and now: Inflation is up, resource utilization is high and growth has moderated. Last month they wanted to emphasize that future Fed action would depend on data, this month the FOMC dropped the word “emphasis”. My guess is that they believe the market finally understands that a pause is not necessarily forever or tacit admission that they went too far. As far as the shift to the present in terms of describing the economic landscape, the FOMC is telling us that if growth is to pull down or at least temper inflation expectations it is going to occur in the next several months. If not, the doves lose and more tightenings are sure to come.

So now it is “wait till August” and the data that are collected between now and then. But if you read the Poole speech to the Korean Bankers and a recent Fed paper, “Do Macro Variables, Asset Markets, or Surveys Forecast Inflation Better?” (Andrew Ang, Geert Bekaert, and Min Wei) one recognizes that what Bernanke et al will be watching are the surveys and the anecdotal and not necessarily the published data.

In sum, the odds are 50/50 for August, though the market has, in its infinite wisdom, has decided that after August the Fed is done and the eases begin a year from now. What the Fed wants is to recapture its position in the mid 90s – no activity for a long period of time. Rates are probably too low for that, but they are balanced against high, and here to stay high, energy prices. The mix is interesting, the cross-currents are many, but there is one thing we can be sure of -- if the market starts pricing in the odds of Fed activity that is well off from where the Fed thinks they should be, they will let us know.