FOMC Minutes - It Can't Be Any More Clear

The FOMC minutes for the Sep 20 meeting were released today, and of course the market sold off. But it still isn't enough. In plain English, the crux of the problem is the view on housing. Here is what the Fed put into the minutes:

In their discussion of the economic situation and outlook, meeting participants noted that the pace of the expansion appeared to be continuing to moderate in the third quarter. In particular, activity in the housing market seemed to be cooling considerably, which would contribute to relatively subdued growth over the balance of the year. Growth was likely to strengthen next year as the housing correction abated, with activity also encouraged by the recent
decline in energy prices and still-supportive financial conditions. In the view of many participants, economic expansion would probably track close to the rate of growth of the economy's potential next year and in 2008. Many participants also noted that core inflation had been running at an undesirably high rate. Although most participants expected core inflation to decline gradually, substantial uncertainty attended this outlook.

The market savants, in their infinite wisdom, the very ones that a year ago were forecasting Fed eases this year, continue to press their view that the Fed is wrong, the housing contagion will spread and slow growth enough to create the need for a lower Federal funds rate.

What the Street arguments seem to lack, as opposed to the Fed argument, is that there are alot of other facets of the economy, unrelated to housing, that are growing. In addition, the drop in energy prices and bond yields are net adds to growth.

There is no way to know apriori who will turn out to be correct, but as evidence of growth sustaining itself continues, remember that the "Fed On Hold" scenario carries about a 40+ basis point move up in yield across the curve.

'nuff said.