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FOMC: Firmly on hold
Wed, Aug 6 2008, 08:26 GMT
by Danske Research Team
Overview: Yesterday evening, the Federal Open Market Committee (FOMC) decided to keep its policy rate unchanged at 2%, as widely expected. Unsurprisingly, one member, Dallas Fed Governor Richard Fisher, voted against the decision, preferring an increase in the fed funds target.
The statement saw only minor changes. If anything, it was slightly more balanced, putting growth and inflation concerns on a more equal footing compared to the previous meeting. The general message remains that the central bank is firmly hold.
The initial market reaction was relatively limited, with 2-year and 10-year Treasuries generally trading side-ways. However, late in the session, the curve steepened slightly as the long end moved upwards. Equities re-sponded positively to the more neutral statement, ending the day on a positive note.
Details: The growth section in the FOMC statement saw little changes, mentioning the same growth re-straints, ie, softening labour markets, financial markets under considerable stress, tight credit conditions, housing correction and energy prices. Note that energy prices, despite their recent decline, are not (yet) cited as a positive growth factor.
There were few changes in the inflation assessment. The FOMC still sees upsides to inflation. Interestingly, the statement refers to energy prices in the past tense. This might be interpreted as a very cautious ac-knowledgement of the recent retrenchment in commodity prices, which, in turn, would be a dovish twist.
Again this time, the committee did not state an explicit balance of risk. Importantly, the phrase 'diminished downside risks' to growth was replaced by 'downside risks'. Upside risks to inflation were not described as having 'increased' but were instead emphasised as being also of significant concern. Generally, the state-ment put growth and inflation risk on a slightly more equal footing than last time. Also, the fact that there was only one dissenter revealed that disagreement within the committee did not widen, although it probably re-mains unusually widespread.
Assessment & Outlook: The outcome of the August meeting does not change our previous assessment that the FOMC is set to keep monetary policy on hold well into next year. Firstly, if the current fall-back in com-modity prices proves sustained, inflation will begin to moderate already during late autumn. In combo with mounting slack in the labour market, this should obviously calm inflation fears. Secondly, the economy will face substantial headwinds for the rest of the year, with a continuing housing correction, declining asset prices, tighter credit and a negative growth payback as the tax rebates peter out. Finally, financial markets remain fragile. In our view this spells a monetary policy on hold for a prolonged period.
Published on Wed, Aug 6 2008, 08:29 GMT
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