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FOMC June 28th Meeting

Thu, Jun 21 2007, 07:29 GMT
by Rae Anne Dodds

BBVA Bancomer

• FOMC will maintain 5.25% rate
• The statement will retain its implicit tightening bias
• It will likely address recent indicators of growth and continue concern over expected inflation moderation

Paragraph on growth: this will likely adjust to acknowledge the recent indications of faster growth: continued strength of the business balance sheets, rising ISM, positive YoY growth for nondefense capital goods, low sales to investment ratio suggesting increased future investment, labor working more hours, and low unemployment. Thus, “Economic growth slowed in the first part of this year” will likely be replaced with, “Recent indicators have suggested somewhat firmer economic growth“. There is a possibility that the language could be more specific by identifying the growth as a rebound. The housing market adjustment will still be considered, and we anticipate no change with the line “adjustment in the housing sector is ongoing.” In addition, the “economy seems likely to expand at a moderate pace over coming quarters” will probably remain unchanged as supported by various FOMC members’ assertions and May 9th minutes.

Paragraph on inflation: even with the continued improvement in core inflation (primarily stemming from moderating shelter costs), the tone will likely be left unchanged: “although inflation pressures seem likely to moderate over time, the high level of resource utilization has the potential to sustain those pressures.” According to NFIB the net percentage of firms raising compensation increased to 29% in May from 26% in April. Moreover, May’s import and producer prices were unexpectedly higher while one year consumers’ inflation expectations increase from 3.3% to 3.5%. However, June’s Beige Book reported that “overall wage pressure do not seem to have increased,” sustaining FOMC’s belief of inflation moderation. In fact, NFIB’s report also noted that the percentage of firms that are currently raising selling prices fell slightly to 16% from 18% in the same period. In addition, shelter prices continue moderating putting downward pressure on core inflation. These counteracting trends will keep the FOMC cautious about their expected inflation moderation.

Paragraph on monetary policy: we do not anticipate any changes. It will retain its hawkish tone while signaling the continuing stance of awaiting more information before a policy change occurs. This is primarily supported through the quietness of FOMC voting members during the inter-meeting period and Bernanke’s continued expectation that inflation will moderate while economic growth will be close to or slightly below potential. The lack of change suggests the 5.25% Fed funds target will remain for the August meeting, supporting our forecast of a prolonged pause.

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Published on  Thu, Jun 21 2007, 07:40 GMT