Fed Moves To The Middle

Handicapping the Fed's interest rate moves has always been a tricky business, but it's become especially difficult in recent months.

As expected, the Fed kept interest rates unchanged at 5,25% at its March 20-21 meeting and tried to strike a balance between the need to sustain growth and the importance of containing inflation, as the panel continued to take a wait-and-see approach, as it has since last June.

In its policy statement. the FOMC said "recent indicators have been mixed" but added that the "economy seems likely to continue to expand at a moderate pace over coming quarters" while "recent readings on core inflation have been somewhat elevated."

The FOMC concluded that the "predominant policy concern remains the risk that inflation will fail to moderate as expected."

The decision to drop language about further firming was widely interpreted by the markets as a move to a neutral position or bias.

If so, that may make Fed watching a bit easier.

Not long ago, enough economists thought the Federal Reserve Board might be cutting interest rates in the first half of 2007, having taken the wind out of the red-hot housing market. But that didn't last for long.

No sooner than most Fed watchers revised their view by talking about about a rate cut in the second half of 2007, did the subprime lending crisis emerge, followed by the global stocks selloff. Suddenly a rate cut -- sooner than later -- was back on the table.

Just as quickly, a very ugly PPI report for Feburary, made that move unlikely. Now some are talking about the possibility of another 25-basis-point rate hike sometime in the future.

At 5.25%, the federal funds rate is still historically low and -- some would say -- neutral enough for an economy nearing its sixth year of expansion, particularly given stubbornly high energy prices.