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.
The paragraph in the Oct 25 statement was:
Economic growth has slowed over the course of the year, partly reflecting a cooling of the housing market. Going forward, the economy seems likely to expand at a moderate pace.
If the Fed came out and said "economy is weaker than expected" they would be expected to ease. Shy of an ease, they gave a nod to the current influx of data. They did it with "substantial" and "recent indicators have been mixed". As for the look forward, its a moderate pace "on balance".
Everything else in the statement stayed the same, including the firming bias. Not much choice given the evidence is mixed and that any true hint of an ease begs the question, why wait?
Will they ease in January? Data dependent, of course. As I wrote earlier, I don't think they will nor do I think they should. But this slight nod is a enough of a crack in their outlook to tee up the possibility.
Initial market reaction has 2 and 3yr paper rallying, with most of that rally in the red Euros. The odds skew for an ease increases as 2007 goes on.
If they don't go in Jan, odds of them going later in the year on are not good. First off, it would confirm that Q4 was where the Fed expects it would be, not where the eco bears calling for recession expect the economy to land. Secondly, the odds of an ease later in the year diminish because the U.S. economy is "adapt and grow". The longer funds stay at this level the greater the probability of reaccelerating growth.
At the very least, the Fed has given us the holiday gift of a bone to gnaw on until January 31.