What you think of today’s statement by the Federal Reserve depends a lot on what you thought before the announcement. Those who believed the Fed was on course to tighten in the fall see the statement as dovish; those who thought that was unlikely see the statement as either neutral or even hawkish.
I’m in the camp who believes this statement was neutral as to the outlook for policy changes.
I didn’t believe the hype, espoused by some particularly outspoken Fed presidents, that rate hikes were coming sooner rather than later. I’ve been listening closely to those who I consider to be at the center of Fed policymaking: Fed Chairman Ben Bernanke, Vice Chairman Donald Kohn and NY Fed Bank President Tim Geithner.
They have made clear that, in order: inflation is expected to decline as commodity prices level out or decrease (Bernanke); that the Fed is prepared to live with a little bit higher inflation and unemployment as the least painful course through difficult times (Kohn); and the state of credit markets are, for now, the most important factor affecting monetary policy decisions (Geithner).
With that framework, today’s statement looks decidedly like the last one. Just as in June:
- “The Committee expects inflation to moderate later this year and next year.”
- “Tight credit conditions, the ongoing housing contraction, and elevated energy prices are likely to weigh on economic growth over the next few quarters.”
- “Although downside risks to growth remain, the upside risks to inflation are also of significant concern to the Committee.”
There was some tweaking of words around the edges, but I don’t think they amount to much as far as the policy outlook is concerned. In several interviews, policy makers have told me they want to remove policy accommodation as soon as possible. They are afraid of being too low for too long, as some have said publicly of the Greenspan Fed in the 2002-to-2005 period.
But “as soon as possible” means some reasonable certainty to the outlook for banks, housing prices and the economy. No one has that now, and the Fed is just not going to tighten while it has the emergency window open for banks and commercial banks to borrow funds.
Think about it: the Fed is making available cheap money at 2.25 percent. What would be the possible reason it would raise the cost of the cheap money it is offering, an inevitable result from a tightening? Recall that late last month, the Fed extended some of those emergency programs into early 2009.
That’s a good time to begin thinking about when the Fed might raise rates. Maybe.
As the Fed headed into this meeting, oil prices were more than 10 percent below the level of the meeting in June. Global growth was slowing, with European data falling off a cliff. Even China’s breakneck growth is forecast to ease somewhat. U.S. unemployment is higher and consumer spending is believed to be on the wane.
The last thing the Fed wants to do is tighten into a slowdown that is gathering global momentum.
Sometimes it pays to study the average number of characters per line in the FOMC statement, divide by 12 and take the square root to get the probability of a change in Fed policy. Not this time. The Fed has been pretty clear about what it will take for them to hike -- and few of those conditions look to be achievable in the next several months.