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FOMC Minutes June 27th/28th Meeting

Fri, Jul 20 2007, 07:28 GMT
by Rae Anne Dodds

BBVA Bancomer

• Risks to economic growth “more balanced”
• Inflation level is “favorable” but moderation trend is not yet convincing
• Fed funds target will continue to be 5.25%

“More balanced” risks to growth while upside risks to inflation persist

According to the FOMC minutes, “Risks to growth were more balanced than at the time of the May meeting.” The balance primarily stems from the improvement in business spending data that was available between the May and June meeting. Moreover, members anticipate stronger foreign demand to further contribute to the firming of business spending. Despite the overall improvement in the risk assessment, the housing sector remains a “key source of uncertainty.” During May’s meeting, member’s expected the housing “to weigh heavily on economic activity through most of the year.” Members now expect the drag of housing activity to “contract for several more quarters” suggesting this downside risk will extend into 2008.

While there were areas where the committee implicitly relaxed previous upside risks, the inflation outlook remained unchanged. The possibility of a lower NAIRU explaining the absence of wage pressures within the tight labor market and an expected 2006 employment downward revision causing historic productivity measures to be revised upward both soften these upside risks. However, external influences from the weakening dollar, commodity price pressures, and the increasing global demand were retained from the May meeting. These upside pressures compounded with the general high level of utilization (both domestically and abroad) are the reason for the Fed’s hesitancy in accepting the recent improvement in core inflation measures as a moderating trend.

Extended pause of monetary policy

In our opinion, with recent core inflation moderation and an increased likelihood that output will grow near trend levels FOMC is likely to continue their “wait and see” strategy. While the minutes signaled some concerns on inflation expectations, recent movements have been easily within the historical norms. Thus, we believe the federal funds target will remain at 5.25% for an extended period given the 2008 forecasts for both output and inflation along with well-anchored inflation expectations. Given the increased stability of the outlook for growth and continuing uncertainties surrounding inflation, FOMC will focus mostly on ensuring that inflationary pressures remain contained.

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Published on  Fri, Jul 20 2007, 07:29 GMT